Final answer:
A Roth 401(k) offers tax-free growth and withdrawals, making it advantageous for individuals who expect to be in a higher tax bracket in retirement. Unlike traditional 401(k) plans, Roth 401(k) contributions are made with after-tax dollars and do not require minimum distributions for the account holder.
Step-by-step explanation:
Roth 401(k) plans offer tax-free growth and withdrawals, whereas traditional 401(k) plans provide tax-deferred benefits. Employees with a Roth 401(k) do not pay taxes on retirement withdrawals if specific conditions are met. Defined contribution plans, such as 401(k)s, are now common, where employers contribute a set amount to an employee's retirement account.
This can be especially beneficial for those expecting to be in a higher tax bracket during retirement. Moreover, the Roth 401(k) has no required minimum distributions (RMDs) for the original owner, which allows for more flexible retirement planning. The choice between a traditional or a Roth 401(k) often comes down to current and expected future tax rates, with the Roth 401(k) being a favorable choice for those anticipating a higher tax rate in the future. It's essential to consider these factors as they can greatly influence the retirement savings outcome.