In addition, any earnings made on pre-tax contributions grow on a tax-deferred basis. That means you don\u2019t have to pay taxes on any gains each year. However, those tax benefits won\u2019t go on forever. Any money withdrawn from a tax-deferred account is subject to ordinary income taxes, and if the withdrawal takes place prior to age 59\u00bd (or in some cases, 55 or 50, depending on your plan\u2019s rules), you may be subject to an additional 10% penalty on the total amount of the distribution.<\/p>\n
Taking the Roth route<\/h2>\n
Contributing to an employer-sponsored Roth account offers different benefits. Roth contributions are considered \u201cafter-tax,\u201d so you won\u2019t reduce the amount of current income subject to taxes. Earnings grow on a tax-deferred basis inside the account, and qualified distributions down the road will be tax-free (under current tax laws).<\/p>\n
A Roth distribution is considered qualified if the account is held for five years and the account owner reaches age 59\u00bd, dies, or becomes disabled. (Other exceptions may apply.)<\/p>\n
Nonqualified distributions are subject to regular income taxes and a possible 10% penalty tax. However, because Roth contributions are made with after-tax dollars, if at some point you need to take a nonqualified withdrawal from a Roth 401(k), only the portion that represents earnings will be taxable.<\/p>\n
\n
Younger Households Are Getting a Jump on Retirement Savings<\/h2>\n
Despite heavier student debt burdens and tougher economic conditions, today\u2019s younger workers have more money saved in workplace defined contribution (DC) plans than previous generations had at the same stage of life (adjusted for inflation).<\/p>\n
Median DC plan assets, in 2022 U.S. dollars (for households with DC plans)<\/strong><\/p>\n Example 2<\/strong>: When Ryan receives an $8,000 medical bill after a trip to the emergency room, he decides to take a nonqualified hardship distribution from his Roth 401(k) account. Of the $20,000 account balance, $18,400 represents after-tax Roth contributions and $1,600 is investment earnings. Because earnings represent 8% of the total account value ($1,600 \u00f7 $20,000 = 0.08), this same proportion of Ryan\u2019s $8,000 distribution \u2014 or just $640 ($8,000 x 0.08) \u2014 will be considered earnings subject to both income taxes and a 10% penalty tax.<\/p>\n Keep in mind that tapping your account before retirement defeats its purpose. If you need money in a pinch, try to exhaust all other possibilities before taking a distribution. The most important benefit of a Roth account is the opportunity to build a nest egg of tax-free income for retirement.<\/p>\n If this still seems like a difficult decision, consider building savings in both traditional and Roth accounts. Doing so would create financial flexibility that might prove useful while you are working and after you retire.<\/p>\n This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. \u00a9 2025 Broadridge Financial Solutions, Inc.<\/p>\n","protected":false},"featured_media":1465,"template":"","meta":{"_acf_changed":false},"newsletter-category":[37],"class_list":["post-1464","newsletter","type-newsletter","status-publish","has-post-thumbnail","hentry","newsletter-category-april"],"acf":[],"yoast_head":"\n![\"Median](\"https:\/\/staging8.dynaserverx.com\/newenglandtrust.com\/wp-content\/uploads\/2025\/04\/WA_25045_Traditional-or-Roth-Contributions-CHART-e1745069049877.jpg\")
\n