Traditional vs Roth 401(k)
Quick Answer
A traditional 401(k) gives you a tax break now (contributions reduce your current taxable income) but you pay taxes on withdrawals in retirement. A Roth 401(k) gives you no tax break now (contributions are after-tax) but withdrawals in retirement are completely tax-free. The right choice depends on whether you expect to be in a higher or lower tax bracket when you retire.
Key Differences
| Feature | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Contributions | Pre-tax (reduces current tax) | After-tax (no current tax benefit) |
| Growth | Tax-deferred | Tax-free |
| Withdrawals in retirement | Taxed as ordinary income | Tax-free |
| Required Minimum Distributions | Yes (starting age 73) | No (starting 2024) |
| 2025 employee limit | $23,500 | $23,500 |
| Employer match goes to | Traditional (always) | Traditional (always) |
Real Example With Actual Numbers
Compare Derek contributing $15,000/year to each type. He earns $95,000 in Florida, is in the 22% federal bracket, and has 25 years until retirement.
Traditional 401(k): $15,000 Contribution
| Item | Amount |
|---|---|
| Tax savings now (22% bracket) | $3,300/year |
| Take-home pay reduction | $11,700/year |
| Balance after 25 years (7% return) | ~$948,000 |
| Tax on $50,000/year withdrawal (12% bracket*) | $6,000/year |
Roth 401(k): $15,000 Contribution
| Item | Amount |
|---|---|
| Tax savings now | $0 |
| Take-home pay reduction | $15,000/year |
| Balance after 25 years (7% return) | ~$948,000 |
| Tax on $50,000/year withdrawal | $0 |
*Assuming Derek is in the 12% bracket during retirement (lower income).
The Math
With traditional, Derek saves $3,300/year in taxes for 25 years = $82,500 in tax savings during his career. In retirement, he pays tax on every withdrawal.
With Roth, Derek pays $82,500 more in taxes during his career but pays zero tax on the entire $948,000 account in retirement.
Traditional wins if your retirement tax rate is lower than your current rate (12% < 22%). Roth wins if your retirement tax rate equals or exceeds your current rate.
When to Choose Traditional
- You are in a high marginal tax bracket now (22%+)
- You expect lower income in retirement
- You live in a high-tax state now and may retire in a no-tax state
- You want to lower your current AGI for tax credit eligibility
- You need the maximum tax benefit today
When to Choose Roth
- You are early in your career with lower income
- You are in the 10% or 12% bracket now
- You expect significant income growth
- You believe tax rates will increase in the future
- You want tax-free income in retirement
- You do not want Required Minimum Distributions
The Split Strategy
Many advisors recommend contributing to both:
- Put enough in traditional to fill up lower brackets or get the employer match
- Put the rest in Roth for tax diversification
- This gives you flexibility in retirement to withdraw from whichever account minimizes taxes
Impact on Your Paycheck
The traditional 401(k) costs less per paycheck because of the immediate tax savings:
| Traditional $500/paycheck | Roth $500/paycheck | |
|---|---|---|
| Contribution | $500 | $500 |
| Federal tax saved | $110 (22%) | $0 |
| Net paycheck reduction | $390 | $500 |
To contribute the same $500 to Roth, Derek's paycheck is $110 smaller than with traditional. Use the SalaryHog calculator to see how each option affects your take-home pay.
Important Notes
- Your employer's match always goes into the traditional (pre-tax) side, even if you contribute 100% to Roth
- Both traditional and Roth 401(k) share the $23,500 annual limit
- Compare traditional vs Roth IRA for additional retirement savings options
- The QBI deduction and other tax provisions may also influence your choice
Model different contribution scenarios at the SalaryHog calculator.