Final answer:
The key difference between a 401(k) and a Roth 401(k) is the timing of taxation: traditional 401(k) contributions are made with pre-tax dollars and are taxed upon withdrawal, while Roth 401(k) contributions are made with after-tax dollars and withdrawals are tax-free.
Step-by-step explanation:
One of the main differences between a 401(k) and a Roth 401(k) is in how they are taxed. A traditional 401(k) allows employees to invest pre-tax income into a retirement account, which means the contributions are made before income taxes are deducted. This leads to a reduction in the taxable income for the year the contributions are made.
The funds in the account then grow tax-deferred, and taxes are paid upon withdrawal after retirement, when the individual's tax rate may be lower. In contrast, a Roth 401(k) uses after-tax dollars for contributions. While this does not lower taxable income in the contribution year, it allows for the potential benefit that upon withdrawal at retirement, no further taxes are owed, even on the investment gains.