Roth vs Traditional 401k: Which Is Better for You?

Many 401k plans let you choose between two kinds of contribution: traditional (pre-tax) and Roth (after-tax). The big difference is when you pay tax.

How they work

	Traditional 401k	Roth 401k
Tax when you put money in	Not taxed now. Lowers your taxable pay this year	Taxed now. No tax break this year
Tax on growth	None while it grows	None while it grows
Tax when you take it out	Taxed as income	Not taxed, if you meet the rules
Required withdrawals	Start at 73 or 75	None while you are alive (from 2024)

Both types share the same yearly limit: $24,500 in 2026 for your own contributions, plus catch-up amounts if you are 50 or older. You can split between the two as long as the total stays within the limit.

The core question

Which is bigger: your tax rate now, or your tax rate in retirement?

If your rate now is higher than it will be later, traditional usually comes out ahead, because you skip tax at the higher rate and pay at the lower one.
If your rate now is lower than it will be later, Roth usually comes out ahead, because you pay tax at the lower rate and never again.
If you expect the same rate, the two are close in value.

Nobody knows what tax rates will be in 20 years, so this is a judgement, not a calculation.

Who often leans Roth

People early in their careers, with lower pay and a lower tax bracket today.
People who expect to earn more later, or who think tax rates will rise.
People who want tax-free income in retirement and no required withdrawals.
People who already have a lot in traditional accounts and want some tax diversity.

Who often leans traditional

People in a high tax bracket now who expect a lower bracket in retirement.
People who need to lower their taxable income this year.

Rules to know

Roth 401k withdrawals are tax-free when they are "qualified": generally you are 59½ or older and have held the Roth account for at least 5 years.
Required withdrawals. Roth 401k accounts no longer have required withdrawals while you are alive. Traditional accounts do.
No income limit. Unlike a Roth IRA, a Roth 401k has no income limit for contributing, if your plan offers it.
Employer match. Plans can allow matching contributions to go into a Roth account too, but many put the match in the traditional side. Check your plan.

Can't decide? Split it

Many people put part of their savings in each. That spreads the tax risk. If you are in the middle, a 50/50 split is a reasonable place to start.

If you already have pre-tax money and wonder whether to move some to a Roth, read our guide to Roth conversions and try the Roth conversion calculator.

Try it yourself Roth conversion calculator Compare tax now with tax-free growth later. Open the calculator →

Sources

This article is for education and is not financial, tax or legal advice. Figures are checked against the sources above and may change. Read the full disclaimer.