Roth 401(k) vs. Traditional 401(k): Which One Is Right For You?

When you enroll in your company retirement plan, one of the biggest decisions you’ll make is whether to contribute to a Traditional 401(k) or a Roth 401(k). Both offer meaningful tax advantages — but the benefits show up at different times. Understanding when and how those tax breaks apply can make a significant difference in your long-term retirement strategy.

In this article, we’ll walk through how each account type works, who may benefit from each option, and how Roth and Traditional IRAs fit into the picture — so you can feel confident your retirement dollars are going to the best place for you.

First: What Makes a 401(k) Tax-Advantaged?

Both Roth and Traditional 401(k)s are tax-advantaged accounts, meaning the IRS gives you favorable tax treatment to encourage saving for retirement. The difference isn’t in the investment choices inside the plan — it’s in how and when your money gets taxed.

How a Traditional (Pre-Tax) 401(k) Works

A Traditional 401(k) is also called a pre-tax 401(k), and that name tells you a lot. In this account type, the tax break happens now. Your contributions go in before taxes are taken out of your paycheck. For example:

• You earn $100,000
• You contribute $10,000 to a Traditional 401(k)
• Your taxable income becomes $90,000

So you pay tax only on $90,000 this year. Then, your investments grow tax-deferred. You don’t pay taxes on dividends, interest, or investment gains along the way. In retirement (usually after age 59½), every dollar you withdraw — both contributions and earnings — is taxed as ordinary income.

Who might benefit from a Traditional 401(k)?

A Traditional 401(k) may be especially attractive if:

• You’re a higher-income earner in a relatively high tax bracket
• You want to lower your taxable income today
• You expect to be in a lower tax bracket in retirement

For example, if you’re currently in the 32–35 percent tax bracket, avoiding taxes at that rate now can add up to meaningful savings.

How a Roth 401(k) Works

A Roth 401(k) flips the timing of the tax break. With a Roth 401(k), you pay taxes now. Your contributions are made with after-tax dollars. Using the same example:

• You earn $100,000
• You contribute $10,000 to a Roth 401(k)
• Your taxable income is still $100,000

There’s no upfront tax deduction. Your investments grow tax-free. And here’s the big benefit. As long as you follow Roth rules (including being over 59½ and meeting the required holding period), both your contributions and investment earnings come out tax-free.

Who might benefit from a Roth 401(k)?

A Roth 401(k) may be appealing if:

• You’re earlier in your career or currently in a lower tax bracket
• You expect your income — and tax rate — to rise in the future
• You like the idea of tax-free withdrawals in retirement

Many younger workers start with Roth contributions, then consider shifting toward Traditional contributions as their income — and tax bracket — grows.

What About Employer Contributions?

Historically, employer contributions were always made pre-tax — even if your own contributions were Roth. Under recent legislation (Secure Act 2.0), some plans now allow Roth employer contributions as well.

If you elect Roth employer contributions, keep in mind:

• Roth employer money is taxable now
• Pre-tax employer contributions are taxable later

Not all plans offer this choice yet, so check yours.

Why Not Both? Tax Diversification

Many people don’t fall squarely into “always Roth” or “always pre-tax.” If your plan allows it, you may consider splitting contributions between Roth and Traditional.

Just like investment diversification spreads market risk, tax diversification spreads future tax risk. Since none of us knows what tax rates will be in the future or exactly what our income will look like in retirement, having both tax-free and taxable buckets can give you flexibility later when deciding where to pull income from.

Important Difference: 401(k)s vs. IRAs

People often confuse Roth and Traditional 401(k)s with Roth and Traditional IRAs. Here’s the key distinction:

• 401(k)s do not have income limits for contributing — Roth or Traditional. Even very high earners can contribute to a Roth 401(k), if the plan offers it.
• Roth IRAs do have income limits. If your income exceeds certain thresholds, you may not be eligible to contribute directly to a Roth IRA.

Also remember: “Roth” and “Traditional” are tax labels — not account types. The account type is the IRA or 401(k); “Roth vs. Traditional” simply describes the tax treatment.

And yes — you can contribute to both a 401(k) and an IRA in the same year, subject to eligibility rules and contribution limits.

(Be sure to check current-year IRS limits, because they adjust over time.)

A Quick Note on the Backdoor Roth IRA

If your income is too high to contribute to a Roth IRA directly, one potential strategy, when appropriate, is a Backdoor Roth IRA.

This involves:

1. Making a non-deductible contribution to a Traditional IRA
2. Then converting that money into a Roth IRA

It can be a useful planning tool, but it comes with tax rules and pitfalls — so it’s wise to get guidance before attempting it.

So…Which One Is Better?

There’s no universal winner — only what’s best for your situation. A Traditional 401(k) may make sense if:

• You’re in a high tax bracket today
• You want to reduce taxable income now
• You expect lower income in retirement

A Roth 401(k) may make sense if:

• You’re in a lower tax bracket today
• You expect your income — or tax rates — to rise
• You like the certainty of tax-free retirement withdrawals

Final Thoughts

The decision between Roth and Traditional contributions is one of the most important — and most misunderstood — retirement planning choices. And because it’s tied directly to your income, taxes, goals, and future plans, the “right” answer is highly personal.

If you’d like individualized guidance, consider speaking with a qualified financial professional who can help you evaluate:

• Your current tax situation
• Expected future income
• Savings goals
• And the role Roth vs. pre-tax dollars should play in your plan

And remember — educational content like this is designed to help you understand your options, not serve as personalized tax or investment advice.

Want more help? Let’s chat.