Withdrawing from regular vs Roth 401K

Question

I work at a company that allows me to put my 401K into either a regular or Roth 401K. My understanding is that:

1. For the regular 401K, I pay taxes when I withdraw money from the 401k.
2. For the Roth, I pay taxes while putting money into the 401K, but pay no taxes when I withdraw.

I have a question about withdrawing from the Roth 401K. I know there is an early withdrawal penalty, but do I have to pay taxes as well if I withdraw early?

Answer 1

You are close to understanding, but it looks like you are slightly off:

regular 401K - The amount you contribute is taken out of your taxable income for tax purposes in the tax year you earn it. However, when you take it out at retirement that withdrawal counts as income for tax purposes. (You pay the tax on the money later)

Roth 401K - The amount you contribute is not taken out of your taxable income for tax purposes in the tax year you earn it. However, when you take it out at retirement that withdrawal will not as income for tax purposes. (You pay the tax on the money now.) Additional benefit: You don't pay tax ever on the gains.

Answer 2

One additional note related to Roth vs regular: for a regular 401k or IRA, you pay the 10% penalty on any withdrawal. For a Roth, you can withdraw the contributions early (but not the earnings) without any penalty or tax.

Of course, if this is a retirement account it's better to leave it that way. Personally it's one reason I avoid Roth - in addition to probably being in a higher bracket now, I also would prefer not to be able to touch my money. But for some there could be advantages in having that ability (such as in an emergency).