How do traditional 401(k) plans differ from Roth 401(k) plans?

Traditional 401(k) plans and Roth 401(k) plans primarily differ in how contributions are taxed. In a traditional 401(k), contributions are made with pre-tax dollars, meaning that the money is deducted from your taxable income for the year. This allows participants to reduce their current taxable income and defer taxes on the contributions and any earnings until withdrawal during retirement.

On the other hand, contributions made to a Roth 401(k) are made with after-tax dollars. This means that taxes are paid on the income before it is contributed to the plan. However, the significant advantage of a Roth 401(k) is that qualified withdrawals in retirement, including earnings, are tax-free, provided certain conditions are met.

This distinction in tax treatment is fundamental to understanding the benefits and potential drawbacks of each plan type as individuals strategize their retirement savings based on their current and expected future tax situations. The other options provided do not accurately represent the key differences between these two types of 401(k) plans.