A Roth 401(k) is a relatively new option that some employers offer along with a traditional 401(k). It’s basically the opposite of a traditional 401(k) plan – meaning you pay the taxes on your contributions, but not your withdrawals. So while you do have to fund it with after-tax dollars, the money grows tax free and you won’t have to pay income tax on any money you take out.
What’s more, you don’t have to make required minimum withdrawals (RMDs) from a Roth 401(k) after you turn 70 ½, as you do with a traditional 401(k). You can leave your money to grow tax-free for decades after you reach retirement. The lack of RMDs makes Roth 401(k)s handy estate-planning tools for some families.
If your employer offers both types of plans, you can divide your savings among them – they will have the same investment options – but your combined annual contributions cannot exceed $17,500 in 2014 ($23,000 for people 50 or older).