This post is continuing in a series that began with Roth IRA vs Roth 401(k). Admittedly that was a complicated post discussing a workplace plan vs a non-workplace plan. This post will be much more manageable. It is designed for those that signed up for one of these 401(k) plans when starting at a new employer without truly understanding the difference.
The good news is that this is a simple conversation. A traditional plan and a Roth plan are just two tax treatments that are available inside the same 401(k) plan. They differ in one way.
You either take the tax break now when contributing or you take it later when withdrawing. That is the entire decision.
What is identical
Before dealing with any differences between a Roth 401(k) and Traditional 401(k), let’s talk about what is the same:
- The contribution limit is the same, and it is shared. More on that below.
- The investment menu is the same. Same funds, same expense ratios, same plan lineup.
- The employer match works the same way regardless of which side you choose. By default it lands in a pre-tax source, though some plans now offer a Roth match.
- When you are allowed to take money out early is the same, because that is governed by your plan rather than by which side you chose.
- Loans, if your plan allows them, work the same way.
The one difference is the timing of your tax payment. That is really the entire post. Simple right? In the Roth IRA vs Roth 401(k) post we had to discuss 6 differences. Here you get one.
The one difference
A traditional 401(k) contribution comes out of your paycheck before federal income tax. It lowers your taxable income for the year. The money grows untouched, and then every dollar you withdraw in retirement, contributions and growth alike, is taxed as ordinary income.
A Roth 401(k) contribution comes out after tax. You get no deduction this year. The money grows untouched, and then a qualified withdrawal comes out with no tax at all. Not on the contributions or the growth.
Same limit, same funds, same plan. You are choosing which year you would rather pay the tax.
The limit is shared, not doubled
For 2026 the IRS elective deferral limit is $24,500, and if you are 50 or older the catch-up adds $8,000, bringing it to $32,500. At ages 60 through 63 the catch-up is $11,250 instead, which brings it to $35,750. Those figures come from the IRS annual limits.
That is one limit covering total 401(k) contributions. You can split it however you want, all traditional, all Roth, or any mix of the two, but the total across both is $24,500. It is not $24,500 in each.
People make the same mistake with IRAs, where the annual limit also covers traditional and Roth together. I compared those two accounts at Roth IRA vs Traditional IRA.
The actual decision: your tax rate now against your tax rate later
If you back everything else out of the discussion, your decision will come down to which tax rate is higher: today’s tax rate or your future tax rate when you make withdrawals.
If your tax rate in retirement will be higher than it is today, Roth wins. You pay tax at today’s lower rate and never pay again.
If your tax rate in retirement will be lower than it is today, traditional wins. You skip tax at today’s higher rate and pay later at a lower one.
Nobody can guarantee what their future tax rate will be, but you certainly can reason about it. Most people do, but without a clear picture of what taxes look like in retirement.
Taxes: now and then
This will be the more complicated section but stick with it.
Your traditional 401(k) deduction comes off the top of your income. If your last dollar earned this year is taxed at 24%, then a $10,000 traditional contribution saves you $2,400 this year. You are saving at your marginal rate which is the highest rate you pay any given year.
Withdrawals in retirement are not necessarily taxed at the marginal rate you are dealing with today. They fill each tax bracket from the bottom up, the same way that your paycheck does.
In 2026 the standard deduction is $16,100 for a single filer and $32,200 for a married couple filing jointly. A retired couple with no other taxable income pulling money from a traditional 401(k) covers that first $32,200 with no federal income tax at all. To be clear, this married couple with no other income can take out $32,200 tax free. The next dollars are taxed at 10 percent, then 12 percent, and the 22 percent bracket does not begin until well into six figures of combined income.
So the comparison is not simply your marginal rate today against the same marginal rate in retirement. A traditional contribution saves tax off the top of your income today, while retirement withdrawals fill whatever taxable income space remains after your other income. Some of those withdrawal dollars might land in a lower tax bracket than you have today. This argument could favor traditional more than even I have argued in the past.
Where the argument weakens
There are limits to this argument though and my situation is applicable here. Most people do not have zero income in retirement. There is social security, pensions, rental income, dividend income and all of this pushes up your tax bracket. If you have substantial income from multiple sources, you may find your retirement marginal tax rate to be higher than expected. To be honest, my hope for folks that peruse my site end up with these other sources of income. It makes for a better retirement……you just have to think about your future tax rate while making decisions on which 401(k) you choose today.
Required distributions
Required distributions differ between a Roth 401(k) and a traditional 401(k) which might seem like a contradiction to my earlier claim that there is only one difference between the two. I still stick to that claim though. This difference only stems from the tax treatment selection.
With a traditional 401(k), you ultimately are required to take distributions. They are referred to as Required Minimum Distributions (RMD) and, if you think about it, they make sense. None of the money sitting in a traditional 401(k) has ever been taxed. Ultimately, the government wants some of it and this is how they accomplish that.
Under SECURE 2.0 the starting age is 73 for people born between 1951 and 1959, and 75 for anyone born in 1960 or later. Once the RMD rules apply to you, you must withdraw a calculated amount every year, whether you need the money or not, and pay ordinary income tax on it.
Beginning in 2024, a Roth 401(k) no longer has required distributions thanks to SECURE 2.0 which removed them for workplace plans. If you read differently in other articles, it is likely because those articles were published prior to the change and not updated.
This matters more than it might sound. Whether you need the income or not, you receive it. You might already be fine with your Social Security and other income but that does not matter. The distribution from a traditional 401(k) will arrive regardless. That interaction is one of the reasons the claiming decision is harder than it looks, and I worked through it in When Should You Actually Take Social Security?.
The Employer Match and Catch Up
Generally the employer match goes in as pre-tax regardless of which 401(k) route you choose. This is important as a lot of individuals contributing to a Roth 401(k) are unaware of this fact. This means that when you make withdrawals in retirement, the employer match will be taxed as ordinary income. Not just the growth on it, but the match itself, because it never was taxed on the way in. This could come as a surprise if you are expecting everything to come out tax free.
Some plans now let you elect a Roth match, but it is optional for the employer, and as of the most recent Plan Sponsor Council of America survey, about one plan in five has adopted it.
And if you are 50 or older with prior-year wages from that employer above $150,000, your catch-up contribution must be Roth starting in 2026. The regular contribution is still yours to split. The catch-up is not.
The whole comparison in one place
| Feature | Traditional 401(k) | Roth 401(k) |
| Tax on the way in | None. The contribution reduces this year’s taxable income | Full. You pay tax on the money before it goes in |
| Tax on the way out | Everything is taxed as ordinary income | Nothing, on a qualified withdrawal |
| 2026 limit | $24,500 combined across both sides, not each | $24,500 combined across both sides, not each |
| Employer match | Pre-tax by default. Roth only if your plan offers that option and you elect it | Pre-tax by default. Roth only if your plan offers that option and you elect it |
| Investment menu | Your plan’s lineup | The same plan lineup |
| Lifetime RMDs | Yes, starting at 73 or 75 depending on birth year | None, starting in 2024 |
What Should You Choose
This post is full of facts. How you choose is about your situation and your judgment……and perhaps a conversation with a tax advisor.
Low Tax Bracket Now With Decades Ahead of You
If you are just starting out, in a lower tax bracket with your whole career in front of you, my opinion would be a Roth 401(k). It is what I would do if I was just starting out. At the very least I would split my contribution between Roth and Traditional. Not everyone would agree with me and you don’t have to either. The real answer as to who is correct lies decades away.
To argue the other side, the math says these two choices land in the same spot if the tax rates are the same now versus retirement. We went over that above. A dollar taxed at 12 percent and then compounded ends up exactly where a dollar compounded and then taxed at 12 percent ends up. Run $10,000 for 35 years at 7 percent and you get about $106,800 either way, and if you invest the deduction the traditional side lands on the same number. That is a mathematical fact.
So the case for choosing Roth at a low tax bracket is more about judgment.
At 12 percent, the tax deduction for a traditional 401(k) contribution is worth $1,200 on a $10,000 contribution. That is what traditional is offering you. In exchange you agree to let the government keep a claim on that $10,000 and on every dollar it earns for the next thirty-five years, to be settled at whatever rate exists when you withdraw it. Nobody knows what that rate will be. You are being asked to trade a known, historically cheap price today for an unknown price decades from now, and the deduction you are being paid to take that bet is small. To be clear, a 12 percent tax bracket for 2026 means roughly $66,500 or less of gross income if you are single, or about $133,000 if you are married filing jointly.
In this scenario, I would choose Roth and settle the tax bill now. At 22, 32, or 35 percent tax brackets the deduction is large enough that traditional deserves a serious look. At 10 or 12 percent you are paying a small, known amount today to remove the tax question from decades of growth. As I said above, that is what I would do.
Peak Earnings Years
I said this above but want to repeat the sentiment in its own space. In a tax bracket of 22, 32, or 35 percent, there is a strong case for the traditional 401(k). This is not tied to age. Some people come out of college and quickly get to these tax brackets. If you fall into a higher tax bracket, taking the deduction now can make a lot of sense but always run this by an expert because they will be familiar with your personal circumstances.
When in Doubt
Don’t let uncertainty about your future tax rate keep you indecisive. If you are worried about the decision, hedge and split your 401(k) contributions into both Roth and Traditional. This will give you two baskets of money to pull from in retirement which is not a bad thing. If you really want to keep the contributions closer to 50% each, you may want to contribute slightly more to Roth knowing the employer match is likely landing on the traditional side. Make sense?
Conclusion
There is one 401(k) plan with two different options that simply boil down to when you pay your tax bill. Pay tax today at a rate you are sure about, or later at a rate you are guessing. Or, split the difference. Or any combination thereof.
The key, as I say often, is to choose something and start. Waiting is much more expensive than ultimately choosing a path that didn’t pan out. Both paths allow you retirement income. They allow you to build wealth and to not be solely dependent on Social Security. If you want to read about how much you actually might need, I discuss this in $1M Isn’t Enough. Let’s Build a Path.
Reevaluate as you age and as your career progresses because where your money resides does impact you in retirement. I discuss this and how you can reach any of your retirement worth in Accessible Wealth vs. Retirement Accounts.
Start investing. Stay consistent. Give your money time to grow.
Cheers!
Christopher
Weekly Notes — October 10, 2026