AI$/$CT$13-94($LO $13-2)$

Assume you asked your favorite AI learning tool "Are dollars contributed to a Roth $401$k equal to a dollars contributed to a traditional $401$k$?"$

No$,$ dollars contributed to a Roth $401($k$)$ are not equal to dollars contributed to a traditional $401($k$)$ after accounting for taxes. The main difference between these two types of retirement accounts is how they are taxed, which affects the after$-$tax value of your contributions. Here's a breakdown of the differences:

Roth $401($k$)$:

Contributions: When you contribute to a Roth $401($k$),$ you use after$-$tax dollars. This means that you've already paid income tax on the money you contribute.

Tax Treatment of Earnings: The earnings and growth in your Roth $401($k$)$ account are tax$-$free. This means that when you withdraw money in retirement, both your contributions and the earnings they have generated are generally tax$-$free, assuming you meet certain requirements $($e$.$g$.,$ you've had the account for at least five years and are age $59(1)/(2)$ or older$).$

Traditional $401($k$)$:

Contributions: Contributions to a traditional $401($k$)$ are made with pre$-$tax dollars. This means that the money you contribute is deducted from your taxable income for the year in which you make the contribution. As a result, you get an immediate tax benefit because your taxable income is reduced.

Tax Treatment of Earnings: In a traditional $401($k$),$ your contributions and any investment gains grow tax deferred. You don't pay taxes on them until you withdraw the money in retirement. When you make withdrawals in retirement, they are subject to ordinary income tax at your then$-$applicable tax rates.

In summary, when you contribute money to a Roth $401($k$),$ you've already paid income tax on that money, and the future withdrawals are generally tax$-$free. When you contribute money to a traditional $401($k$),$ you get a tax deduction upfront, but you'll pay income tax on both your contributions and the earnings when you withdraw the contributions and earnings in retirement.

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