Roth vs Traditional 401k: Which is the Best Choice for Your Retirement?

Written by Hazel Secco, CFP®, CDFA®

Feeling a bit confused about whether to choose Roth or Traditional for your 401k? You’re not alone—this decision trips up even the most financially savvy people. And honestly, it makes sense! This choice could make a significant impact in your retirement savings.

Both Roth and Traditional 401k plans offer great tax benefits, but they work a little differently. With a Traditional 401k, you get tax breaks now, while with a Roth 401k, you get the benefit of tax-free withdrawals when you retire. It’s all about when you want to save on taxes—now or later. If you’re unsure, don’t worry, we can chat through it and figure out what’s best for you!

Choosing between a Roth or Traditional 401k can be tricky, but it really comes down to a few key factors—like your current income, your expected tax bracket when you retire, and your overall financial goals. Understanding these differences is super important to make sure you’re picking the best option for your future, no matter where you are in your career. This guide will help you compare the two and find the right fit for your retirement savings, so you can feel confident about your decision moving forward.

How Traditional 401k Tax Benefits Work

With a Traditional 401k, you can contribute pre-tax dollars, which helps lower your taxable income right now¹. Here’s a simple example: Let’s say you make $35,000 a year and decide to contribute 6% ($2,100) to your Traditional 401k. Your taxable income drops to $32,900, which means you save $525 in taxes that year. Pretty nice, right?¹

Roth 401k Tax Advantages Explained

A Roth 401k works a bit differently. You pay taxes on your contributions now, but the big benefit is that when you retire, your withdrawals are tax-free². That means your money can grow without worrying about taxes, and you won’t owe anything when you take it out later. How awesome is that?²

Impact on Take-Home Pay

The difference shows up right away in your paycheck:

Account Type	Impact on Current Pay	Impact on Future Withdrawals
Traditional 401k	Higher take-home pay (tax break now)	Taxed at withdrawal
Roth 401k	Lower take-home pay (taxed now)	Tax-free qualified withdrawals

Roth accounts got even better in 2024! You no longer have to take minimum distributions (RMDs), so you can leave your money to grow as long as you want. Traditional 401k holders, on the other hand, must start taking RMDs at age 73³.

Just a heads up—if your employer offers a match, those contributions will go into a traditional pre-tax account, no matter which option you choose⁴. Also, for 2024, you can contribute up to $23,000 per year to your 401k, and if you’re 50 or older, you get an extra $7,500 to catch up!³

Life Stage Decision Framework

Retirement planning isn’t one-size-fits-all. Where you’re at in life really matters when it comes to deciding between a Roth and a traditional 401k.

Early Career Considerations

A Roth 401k is a great choice when you’re just starting out in your career. With lower earnings and being in a lower tax bracket, paying taxes now can actually save you money in the long run⁵. Clearing those tax obligations while your tax burden is lighter is a smart move. Plus, the tax-free growth over the years really boosts your retirement savings.

Mid-Career Strategy Changes

As your career moves forward, your retirement plan needs to change too. When you hit your peak earning years, you’ll likely be in a higher tax bracket. Here’s a practical way to think about it:

Life Stage	Income Level	Recommended Strategy
Early Career	Lower	Roth 401k Focus
Mid-Career	Higher	Traditional 401k Focus
Pre-Retirement	Peak	Mixed Approach

Pre-Retirement Planning

As retirement gets closer, boosting your savings becomes super important. Once you hit 50, you can contribute an extra $7,500 a year⁶. Both Roth and traditional accounts offer great tax flexibility when you retire. Plus, having a lower taxable income can help reduce your Social Security taxes and Medicare premiums⁷.

You’ve got the flexibility to switch up your strategy. Splitting your contributions between both types of accounts⁷ gives you the best of both worlds. Having different “income buckets” for retirement makes it easier to manage your taxes down the line⁵.

Investment Growth Comparison

Your retirement savings can really take off thanks to compound interest. The way it grows depends on whether you go with a Roth or traditional 401k. Let’s take a look at how your money can grow over time.

Long-term Compound Interest Effects

Compound interest is like a snowball rolling down a hill – it gets bigger the longer it goes. If you start with a $5,000 investment and earn a 7% return, compounded monthly, you could end up with $40,582 in 30 years⁸. And if you add $200 a month to that original investment, your savings could grow to $284,576!⁸

Tax-Free vs Tax-Deferred Growth

The tax treatment makes a real difference. Here’s a simple breakdown:

Account Type	Initial Investment	Growth	Tax Impact
Traditional 401k	Pre-tax contribution	Tax-deferred	Taxed at withdrawal
Roth 401k	After-tax contribution	Tax-free	$100,000 stays $100,000 7

A Roth 401k gives you a more valuable retirement fund because everything in your account is yours to keep. The tax-free growth is a game changer, especially over the long haul, since you won’t pay taxes on any of your compound earnings.

Investment Timeline Impact

Time is your biggest ally when it comes to growing your investments. Starting early and contributing regularly can make a huge difference in your retirement savings. For example, if you invest $100 at 25 and add $50 a month for 35 years, you could have $91,203 by age 60, assuming a 7% return⁸.

Key benefits of early investment:

• Your money compounds longer
• You can benefit from dollar-cost averaging ⁸
• Market ups and downs smooth out over extended periods ⁸

Compound growth stands out as one of the simplest yet most effective tools to build your savings ⁸.

Making the Choice Based on Income

Making smart money moves often comes down to timing, and your income plays a big role in choosing between a Roth and traditional 401k. Your earnings can help guide you to the best option.

Current vs Expected Future Tax Brackets

Your current tax situation shows where you’re at now, but retirement planning is all about looking ahead. If you’re in a low tax bracket (12% or less) right now, a Roth 401k could be your best bet⁹. Paying taxes at 12% today could help you avoid paying a higher rate (like 22% or more) in retirement⁹.

Income Level Considerations

Here’s what the income limits look like for 2024:

Income Status	Contribution Impact
Under $146,000 (Single)	Full Roth contribution allowed 10
$146,000-$161,000 (Single)	Reduced contribution allowed 10
Under $230,000 (Married)	Full contribution allowed 10
Over $155,000	Considered highly compensated 11

If you’re a high earner, you might need to front-load your contributions. A lot of professionals hit their contribution limits in the first half or three-quarters of the year¹².

State Tax Implications

State tax rules are another factor to consider in your decision. If you’re thinking about moving to a tax-free state when you retire, putting money into a traditional 401k now might be a smarter choice⁹.

Here are the key points:

• State tax rates can really impact your retirement income.
• Moving to a state with no income tax could lower your overall tax burden.
• How your current state taxes your income matters, especially when compared to where you plan to retire.

The rules are changing in 2026. If you make more than $145,000 a year, your catch-up contributions will have to be Roth contributions¹³. This is something to factor into your long-term strategy.

Comparison Table

Feature	Traditional 401k	Roth 401k
Contribution Tax Treatment	Pre-tax dollars (reduces current taxable income)	After-tax dollars
Withdrawal Tax Treatment	Taxed at withdrawal	Tax-free qualified withdrawals
Effect on Take-Home Pay	Higher take-home pay (immediate tax break)	Lower take-home pay (taxed now)
Required Minimum Distributions (RMDs)	Required starting at age 73	No RMDs (as of 2024)
Contribution Limits (2024)	$23,000 ($7,500 additional if 50+)	$23,000 ($7,500 additional if 50+)
Best Suited For	– Higher income earners – Peak earning years – Those expecting lower tax bracket in retirement	– Early career professionals – Lower tax brackets – Those expecting higher tax bracket in retirement
Employer Match Treatment	Goes into traditional pre-tax account	Goes into traditional pre-tax account
Investment Growth	Tax-deferred growth	Tax-free growth
Income Limits (2024)	Not mentioned	– Single: Full up to $146,000 – Single: Reduced $146,000-$161,000 – Married: Full up to $230,000

Conclusion

Choosing between a Roth and a Traditional 401k will have a big impact on your retirement. Your life stage, income, and future tax situation will help you decide.

Traditional 401ks are great for boosting your take-home pay now and offering immediate tax benefits, especially during your peak earning years. On the other hand, Roth 401ks lower your take-home pay today but allow for tax-free withdrawals later, making them a popular choice for those early in their careers.

Starting in 2024, Roth accounts including Roth 401ks won’t have required minimum distributions (RMDs), which adds a whole new factor to consider. Both options offer strong routes to building a nest egg. A Traditional 401k might be better if you expect lower taxes in retirement, while a Roth 401k could be more valuable if you think tax rates will be higher down the road.

Keep in mind, you can always change your mind later. A lot of successful retirement plans use both types of accounts to create tax diversity. Your strategy should evolve as your career progresses, your income changes, and your life moves forward.

Curious about how to make the best choices for your retirement and align them with your unique goals? Book a free intro call with us today to explore personalized solutions tailored just for you!

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