Traditional 401(k) plans mean any contributions for retirement savings are deducted from wages and salary on a pre-tax basis, meaning taxes are not paid during the investment saving and accumulation period and taxed when withdrawn at or after the eligible retirement age.
However, unlike pre-tax salary deferrals, a Roth 401(k) plan uses after-tax contributions, meaning taxes are paid when the contribution is deferred from the paycheck.
Roth 401(k) contributions are therefore not taxed when withdrawn from the plan. Earnings on Roth contributions are also not taxed when withdrawn from the plan if your withdrawal is a qualified distribution. According to the IRS, a “qualified distribution” is a distribution is made:
- at least five years after the first contribution to the Roth account; and
- after age 59½ or on account of a disability, or to a beneficiary after the 401(k) plan participant’s death.