Should I Contribute to a Roth or Traditional 401(k)?

Deciding between a Roth or Traditional 401(k) involves choosing whether to pay taxes on your retirement savings now or in the future. The best path depends on an evaluation of your current income and tax situation against what you anticipate for your finances during retirement. Factors such as your age, career trajectory, and potential changes in tax laws can all influence the long-term value of your savings. As your financial picture evolves, the ideal contribution strategy may also change.

Understanding the Core Difference in Tax Treatment

The distinction between a Traditional and a Roth 401(k) is when you pay income taxes. Contributions to a Traditional 401(k) are “pre-tax,” meaning they are deducted from your paycheck before federal and state income taxes are calculated. This reduces your current taxable income for the year.

For example, if you earn $80,000 annually and contribute $10,000 to a Traditional 401(k), your taxable income is lowered to $70,000. The money in the account, including contributions and investment earnings, grows on a tax-deferred basis. This means taxes are postponed until you withdraw the funds in retirement.

When you withdraw from a Traditional 401(k) in retirement, both your contributions and their earnings are taxed as ordinary income. The tax rate you pay will be based on your total taxable income in that retirement year. This approach is beneficial if you expect to be in a lower tax bracket during retirement than in your peak earning years.

Conversely, contributions to a Roth 401(k) are “post-tax,” meaning you pay income taxes on your earnings before you contribute. Using the same $80,000 salary, a $10,000 contribution to a Roth 401(k) means your taxable income remains $80,000. You receive no upfront tax deduction, so your immediate take-home pay will be lower compared to an equivalent pre-tax contribution.

The benefit of the Roth 401(k) is that your contributions and all investment earnings grow tax-free. Withdrawals in retirement are not subject to federal or state income tax, provided they are “qualified.” For a withdrawal to be qualified, the account must be at least five years old and you must be at least 59½.

Key Factors in Your Decision

Your Current vs. Expected Future Tax Rate

Your projection of future income and tax rates is the main factor in this decision. If you anticipate being in a higher tax bracket during retirement than you are today, the Roth 401(k) is advantageous. By paying taxes on your contributions now, while in a lower bracket, you secure tax-free withdrawals when your tax rate is higher.

This scenario is common for young professionals early in their careers. Their current income may place them in a lower tax bracket, but they have potential for salary growth. For them, paying taxes now at a lower marginal rate could be more favorable than paying taxes in retirement at a higher rate on a larger account balance.

Conversely, if you expect your tax bracket to be lower in retirement, the Traditional 401(k) may be better. This applies to individuals at their peak earning years who expect their income to decrease after they stop working. Taking the tax deduction now provides immediate savings at their current high marginal rate, and they will pay taxes on withdrawals at a lower rate in retirement.

Employer Match Rules

Regardless of whether you contribute to a Traditional or Roth 401(k), employer matching funds are almost always made on a pre-tax basis. This means the money your employer contributes goes into a separate, pre-tax portion of your 401(k) account.

If you contribute exclusively to a Roth 401(k), you will have two types of money in your plan: your post-tax Roth contributions and your employer’s pre-tax matching funds. In retirement, withdrawals from your Roth balance will be tax-free, while withdrawals from the employer match balance and its earnings will be taxable.

Recent legislation allows employers to offer a Roth match, but this feature is optional and not yet widely adopted. For most employees, the company match will create a traditional, tax-deferred component in their retirement plan that is subject to income tax upon withdrawal.

Contribution and Income Limits

The IRS sets annual limits on employee 401(k) contributions. For 2025, the limit is $23,500. This is a combined limit for both Traditional and Roth 401(k) contributions, meaning you must allocate your total contributions between the two account types up to this single limit.

Individuals age 50 and over can make catch-up contributions. For 2025, the standard catch-up amount is $7,500, but a higher catch-up of $11,250 is available for those aged 60 to 63. Beginning in 2026, participants with prior-year wages over $145,000 must make all catch-up contributions to a Roth account. If their employer’s plan does not permit Roth catch-up contributions, these high-earners cannot make any catch-up contributions.

A key feature of the Roth 401(k) is the absence of income limitations for contributions. Unlike a Roth IRA, which has income phase-outs preventing high-earners from contributing, the Roth 401(k) is available to any eligible employee, regardless of income. This makes it a useful tool for high-income individuals who are ineligible for direct Roth IRA contributions.

Required Minimum Distributions (RMDs)

Required minimum distributions (RMDs) are mandatory annual withdrawals from retirement accounts, beginning at age 73. While Traditional 401(k)s are subject to RMDs, a recent change eliminated RMDs for Roth 401(k) accounts for the original owner. This aligns Roth 401(k) rules with those of Roth IRAs.

This allows funds in a Roth 401(k) to grow tax-free for your entire lifetime without forced withdrawals. The penalty for failing to take a required distribution from a Traditional 401(k) is 25% of the amount that should have been withdrawn. This can be reduced to 10% if the mistake is corrected promptly.

After leaving an employer, you can roll over assets from a Roth 401(k) into a Roth IRA. This move can provide more investment options and flexibility. It also ensures the funds can be passed to beneficiaries under IRA rules.

Implementing Your Contribution Strategy

Choosing Your Contribution Mix

The choice between a Roth and Traditional 401(k) is not an all-or-nothing decision, as many plans allow you to split contributions between both. Contributing to both simultaneously is an effective way to hedge against uncertain future tax rates. This tax diversification ensures you will have both tax-deferred and tax-free funds in retirement.

For example, you could direct half your contribution to a Traditional 401(k) for an immediate tax break and half to a Roth 401(k) for tax-free growth. This approach provides flexibility in managing your taxable income during retirement. You can draw from the traditional portion in some years and rely on tax-free Roth withdrawals in others to manage your tax liability.

This hybrid strategy is useful for those unsure about their future income or potential tax law changes. It provides a middle ground that captures some benefits of each account type. You can adjust this mix over time as your financial situation becomes clearer.

Coordinating with a Roth IRA

You can contribute to both an employer-sponsored 401(k) and an Individual Retirement Arrangement (IRA) in the same year, if you meet the eligibility requirements. An IRA is an account you open on your own. This opens up more possibilities for managing your retirement savings and tax exposure.

One strategy is to contribute to a Traditional 401(k) at work to get the full employer match and an immediate tax deduction. At the same time, you can contribute to a separate Roth IRA. This builds a pool of money that will be tax-free in retirement.

This strategy is subject to Roth IRA income limitations. For 2025, the ability to contribute is reduced for single filers with a modified adjusted gross income (MAGI) between $150,000 and $165,000, and eliminated above that. For married couples filing jointly, the phase-out range is between $236,000 and $246,000.

Reviewing and Adjusting Your Choice

Your 401(k) contribution choice is not a one-time decision and should be reviewed periodically. Life events and changes in your financial circumstances can alter whether a Roth or Traditional contribution is more beneficial.

Reassess your strategy after events like a salary increase, promotion, or change in marital status. A large raise could push you into a higher tax bracket, making the Traditional 401(k) deduction more valuable. Conversely, if you expect your income to continue rising, you might lean more toward Roth contributions.

Changes in federal tax law are another reason to review your choice. If tax rates are scheduled to increase, it might make sense to pay taxes now with Roth contributions. You should adjust your contribution type to align with your evolving financial picture and long-term goals.