Roth vs Traditional 401(k): Tax Now vs Tax Later
**Traditional** 401(k) contributions reduce taxable income now; withdrawals in retirement are taxed as ordinary income. **Roth** contributions are after-tax but qualified withdrawals can be **tax-free**. The better choice hinges on **current vs expected future tax brackets** and liquidity needs.
Step by step
1. Estimate marginal brackets
Compare your marginal rate today vs expected rate in retirement (including state taxes if relevant).
2. Consider employer match
Match is often to traditional regardless—still contribute enough to capture full match before optimizing Roth vs traditional split.
3. Factor RMDs and flexibility
Traditional accounts have required minimum distributions (Roth IRAs differ; Roth 401(k) rules have evolved—confirm current law). Roth can simplify tax planning for heirs under current rules.
Roth vs traditional
Tax diversification (both buckets) is common when you are unsure of future rates.
- Traditional: Tax break now; taxed on withdrawal; RMDs on traditional accounts.
- Roth: Pay tax now; potential tax-free growth; no RMDs on Roth IRA (check Roth 401(k) rules).
- High earner now: Traditional often wins if you expect lower bracket in retirement.
- Early career: Roth often wins when current bracket is low and income may rise.
Common mistakes
- Ignoring state taxes
- Choosing Roth without emergency cash buffer first
FAQ
Can I contribute to both?
Yes, subject to combined annual 401(k) limits; check IRS limits for the year.
Does employer match go to Roth?
Depends on plan design—many plans match into traditional.