Roth 401(k) vs. 401(k): What To Know
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In a traditional 401(k) plan, pre-tax contributions could offer an immediate tax break, but you’ll pay taxes when withdrawing in retirement.
Contributions to a Roth 401(k) plan come out of after-tax income, but the money grows tax free.
You can contribute to both a traditional and Roth 401(k), as long as contributions don't exceed the combined annual maximum.
When it comes to retirement plans, many employers now offer the Roth 401(k) alongside the traditional version. As an employee, it’s possible to have and contribute to both types of accounts while also earning an employer match if offered.
The main difference between a Roth 401(k) and a traditional 401(k) is their tax treatment. With a Roth 401(k), contributions come out of your paycheck after taxes, but distributions in retirement are tax-free. In a traditional 401(k) plan, contributions come directly from your paycheck before taxes, which can reduce taxable income for that year, but withdrawals are taxed in retirement.
Compare: Roth 401(k) vs. traditional 401(k)
Roth 401(k) | Traditional 401(k) | |
|---|---|---|
Contribution limits | The 401(k) contribution limit applies to both accounts.You can contribute up to $23,000 in 2024 and $23,500 in 2025. In 2024 and 2025, people age 50 and older can contribute an extra $7,500 as a catch-up contribution. In 2025, due to the Secure 2.0 Act, those ages 60 to 63 get a higher catch-up contribution of $11,250. You can contribute to both accounts in the same year, as long as you keep your total contributions under the cap. | |
Tax treatment of contributions | Contributions are made after taxes, with no effect on current adjusted gross income. Employer matching dollars must go into a pretax account and are taxed when distributed. | Contributions are made pretax, which reduces your current adjusted gross income. |
Tax treatment of withdrawals | No taxes on qualified distributions in retirement. | Distributions in retirement are taxed as ordinary income. |
Withdrawal rules | Withdrawals of contributions and earnings are not taxed as long as the distribution is considered qualified by the IRS: The account has been held for five years or more and the distribution is:
Unlike a Roth IRA, you cannot withdraw contributions any time you choose. | Withdrawals of contributions and earnings are taxed. Distributions may be penalized if taken before age 59 ½, unless you meet one of the IRS exceptions. |
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Roth 401(k) vs. traditional 401(k): Taxes
Sometimes, choosing between a Roth 401(k) and a traditional 401(k) comes down to how you want to put money into the account and how you want to take money out.
Let’s start with today — putting money in. If you’d prefer to pay taxes now and get them out of the way, or you think your tax rate will be higher in retirement than it is now, consider a Roth 401(k).
By paying taxes on that money now, you’re shielding yourself from a potential increase in tax rates by the time retirement rolls around. (Keep in mind that your own taxable income may drop, potentially still putting you in a lower tax bracket.)
You’re also giving yourself access to a more valuable pot of money in retirement: $100,000 in a Roth 401(k) is $100,000, while $100,000 in a traditional 401(k) is $100,000 minus the taxes you’ll owe on each distribution.
In exchange, each Roth 401(k) contribution will reduce your paycheck by more than a traditional 401(k) contribution, since it's made after taxes rather than before. If your primary goal is to reduce your taxable income now or to put off taxes until retirement because you think your tax rate will go down, you will do that with a traditional 401(k).
Just know that:
You’re kicking those taxes down the road, to a time when your income and tax rates are both relatively unknown — and might be higher if you advance in your career and start earning more.
If you want the after-tax value of your traditional 401(k) to equal what you could accumulate in a Roth 401(k), you would need to invest the tax savings from each year’s traditional 401(k) contribution.
If you can’t or don't want to invest that tax savings — and it could be a considerable amount, for those in high tax brackets making maximum contributions — the Roth 401(k) may be a good choice.
Other considerations
Taxes are important, and they're the primary factor in this debate. But there are other points to consider:
Whether you’re eligible for a Roth IRA. Roth IRAs have income limits, but Roth 401(k)s do not. If you earn too much to be eligible for the Roth IRA, the Roth 401(k) is a chance to get access to the Roth’s tax-free investment growth.
Certain income thresholds in retirement. Taking some of your retirement income from a Roth can lower your gross income in the eyes of the IRS, which may in turn lower your retirement expenses. A lower income in retirement may reduce the taxes you pay on your Social Security benefits and the cost of your Medicare premiums that are tied to income.
Access to your retirement money. Unfortunately, the Roth 401(k) doesn’t have the flexibility of a Roth IRA; you can't remove contributions at any time. In fact, in some ways it’s less flexible than a traditional 401(k), due to that five-year rule: Even if you hit age 59 ½, your distribution won’t be qualified unless you’ve also held the account for at least five years. That’s something to keep in mind if you’re getting a late start.
Required minimum distributions in retirement. Traditional 401(k)s require account owners to begin taking distributions at age 73, but as of January 2024, Roth 401(k)s do not have required minimum distributions (RMDs). A Roth 401(k) also can easily be rolled into a Roth IRA.
Finally, remember that you can split the difference and contribute to both accounts — and you can switch back and forth throughout your career or even during the year, assuming your plan allows it. Using both accounts will diversify your tax situation in retirement, which is always a good thing.
» Want to explore the Roth IRA? See our pics for the best Roth IRA accounts.
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