Roth 401(k) vs. Traditional 401(k)

By Justin Pritchard, CFP®

Your retirement plan might have several options, including choosing between Roth 401(k) vs. traditional 401(k) contributions.

This can be a really big deal. Not only will it affect how you pay taxes today and in retirement, but it can also impact healthcare costs and Social Security taxation in retirement.

Fortunately, you don’t necessarily have to choose one or the other. Instead, you can mix and match or change contributions based on what works best for you. And while we’ll refer to Roth 401(k) here, much of this applies to similar plans like Roth 403(b), 457, and the TSP.

On this page:

  • How the different contribution types work
  • Pros and cons of each option
  • When you might favor one over the other

Continue reading below, or get similar information from this video.

Basics of Roth vs. Traditional 401(k)

For starters, it’s helpful to know a few key things.

The question of Roth or traditional contributions refers to pre-tax or after-tax contributions to your retirement plan.

  • Roth contributions are after-tax contributions, and they’re separate from other after-tax contributions you might be allowed to make.
  • Traditional contributions are pre-tax contributions.

So, you’re choosing when to pay taxes when you pick a contribution type. That choice affects your taxes today and later. When I work with clients on retirement income plans, their mix of holdings affects actions they might need to take as they get ready to retire and as they go through retirement.

  • Roth: You pay tax on all of your income today, but you ideally get tax-free income later.
  • Traditional: Your contributions reduce taxable income today, but you typically need to pay taxes later.

Why it Matters

It might seem intuitive to get a tax break today and deal with taxes later. So, you might find it appealing to make pre-tax contributions and be done with it. But taxes in retirement can be complicated. Here’s why this is worth paying attention to:

  • You might be in a different tax bracket when you withdraw funds. That could happen due to a different income level or changes in tax rules.
  • A high income in retirement can affect how much you pay for healthcare (whether Marketplace/Exchange coverage or Medicare).
  • Income above certain levels causes some of your Social Security income to be included in your taxable income.

Optional Feature

All that said, not everybody has the option to make Roth contributions. Some plans don’t offer this feature (your employer is allowed to but not required to do so). If you don’t currently have the option, consider asking your employer to add the Roth feature to your plan.

If your plan allows Roth contributions, you can generally put some or all of your contributions toward Roth. So, you might do 100% of your salary deferral contribution to Roth, put 100% into traditional, or split contributions in any way you want.

For example, the salary deferral contribution limit for those under age 50 in 2023 is $22,500. Those aged 50 and older can add a catch-up contribution of $7,500. So, you could do $11,250 to Roth and $11,250 to pre-tax if you wanted. Or, you might favor the traditional contribution with $15,000 and add the remaining $7,500 to Roth.

401(k) Plans vs. IRAs

It can be easy to confuse workplace retirement plans like 401(k) plans with IRAs. But the rules are different.

  • Distributions: Withdrawals from Roth 401(k) are less flexible than withdrawals from Roth IRAs. A distribution may require you to take some taxable earnings along with a return of your contributions.
  • Eligibility: There is no maximum income limit to contribute to Roth 401(k). But if you earn too much, you might not be allowed to contribute to a Roth IRA.
  • Deductions: If you make traditional pre-tax 401(k), you can reduce your taxable income regardless of your income level. For some people, a deduction to a traditional IRA is not available.


In some ways, the choice between Traditional 401(k) vs. Roth 401(k) contributions isn’t huge.

  • Matching: With either option, you are eligible for any matching your employer offers.
  • Tax deferral: Money inside of your account generally grows without taxation. Unfortunately, that also means there is typically no way to claim losses inside of your 401(k) plan. The difference comes when you ultimately take distributions and spend the money.
  • Accessibility: The funds you contribute are usually tied up in your workplace plan until you leave your job. That’s different from a Roth IRA, which allows you to take out your regular contributions at any time without taxes or penalties. That said, you might be able to access funds through loans, hardship withdrawals, or in-service distributions.
  • Investments: In most cases, your investment selection is the same in the pre-tax and the Roth buckets of your 401(k).
  • IRAs: You can still contribute to an IRA when you make either Roth or Traditional 401(k) contributions. Contributing to a 401(k) does not prevent you from making IRA contributions. However, based on your income and other factors, you might or might not be eligible for Roth or deductible IRA contributions. You can always make non-deductible IRA contributions (potentially as part of a backdoor Roth strategy) as long as you have eligible income.

How Pre-Tax Contributions Work

When you make traditional pre-tax contributions, you reduce your taxable income as well as your take-home pay. You should see that reduction on your W2 form in Box 1. Because that number is smaller than it would have been, those contributions are similar to getting a deduction on your taxes. But unlike many deductions, you don’t need to qualify (other than having access to a workplace plan and making pre-tax contributions).

Note that pre-tax contributions are still subject to payroll taxes. You can avoid (at least temporarily) federal and state income taxes, but you still pay FICA tax. That’s not necessarily the end of the world, as those taxes go toward your Social Security and Medicare benefits.

How Roth 401(k) Contributions Work

If your plan allows you to make Roth contributions, you pay tax on 100% of your earnings each year. Your take-home pay will be reduced, but there is no reduction in Box 1 of your W2. Still, your employer forwards your contributions to the retirement plan, and the money gets invested. This might function similar to any other after-tax deductions from your pay.

How Matching Works

The decision between Roth 401(k) vs. pre-tax 401(k) contributions should not cause you to miss out on any matching available from your employer. So, you can choose whichever option fits best with your finances.

Traditionally, all matching money went into pre-tax accounts in your workplace plan. But due to SECURE 2.0 legislation, employers may make matching contributions to Roth-type accounts instead. However, it may take a while for employers and 401(k) vendors to update everything and implement that change. Ask your employer if you can choose where the money goes, and check in periodically if you want it to go to Roth. If you choose Roth, you would show additional taxable income, but it might be worth it for you.

How Distributions Work

Your retirement plan providers generally track traditional and Roth money separately for you. You would have two (or more) “buckets” of money in your 401(k), and you’ll keep those funds separate when you take a distribution.

For instance, if you leave your job and request a rollover to your own IRAs, you would likely get two separate checks. One check, for the Roth 401(k) money, would typically go into your Roth IRA. Another check, for your pre-tax money, would generally go into a traditional or rollover IRA. However, you might choose to perform Roth conversions when taking a distribution, which is a topic for another article.

Roth 401(k) Distributions

Roth 401(k) distributions can potentially be tax-free in retirement. The whole point of making Roth contributions is to set yourself up for that tax-free income. But for distributions to qualify for tax-free treatment, you need to satisfy IRS rules for a qualified distribution.

Five-year rule: As you explore qualified distributions, be mindful of the five-year rule. It may be possible to satisfy that requirement with an IRA outside of your workplace plan. Opening (and funding) a Roth IRA could make sense if you’re making Roth 401(k) contributions and you haven’t already opened a Roth IRA. By starting the clock, you give yourself more options.

RMDs: There are no required minimum distributions (RMDs) for Roth 401(k) as long as the account owner is living. In the past, Roth 401(k) did have RMDs while Roth IRA did not, but those rules changed for 2024 and beyond with SECURE 2.0.

Pro-rata distributions: A complication with Roth 401(k) distributions is the fact that money comes out pro-rata if you’re not taking a qualified distribution. For example, say you have $100,000 in Roth 401(k). $80,000 of that is from your contributions, and the remaining $20,000 is earnings. If you take a hardship distribution of $10,000 while you’re 50 years old, you’ll take out the basis and earnings proportionally. So, you’d get $8,000 of basis, and $2,000 of earnings which could be subject to taxes and penalties.

Traditional 401(k) Distributions

You generally include distributions from pre-tax accounts in your income. It’s similar to earning money from work, as those distributions are reported as ordinary income. But deductions and tax credits can reduce your tax liability.

It’s important to recognize that you probably can’t spend all of the money in your pre-tax retirement accounts. Taking distributions usually creates a tax liability, so you’ll need to come up with those tax payments from somewhere. You might use taxable accounts or tax withholding on distributions, but no matter how you do it, there’s often a tax consequence of taking distributions from traditional 401(k) accounts.

Think of it like a bag of chips: You see the bag and reasonably assume it’s full of goodness. But when you open the bag, you find that you can only eat a portion of the volume you were expecting—the rest is air. Similarly, you might view your pre-tax accounts as a sizable resource, but it’s important to budget for some of that money going away as a tax payment.

Or, if you’re not a fan of food analogies, think of it like your salary vs. your take-home pay. You earn X, but when you get your paycheck, it’s typically less after taxes and other deductions.

Take Income From IRA or 401(k)?

In practice, most people don’t go through retirement spending from their 401(k). Typically, they move assets to an IRA and take income from those accounts instead. There are pros and cons of rolling over to an IRA, so you need to evaluate the decision carefully, but it’s worth considering this possibility. With an IRA, you might have more flexibility on Roth withdrawals (avoiding the pro-rata issue) and a separate five-year clock.

Pros and Cons of Traditional or Roth 401(k)

Roth 401(k):

  • Potential for tax-free income in retirement if you meet the requirements for qualified distributions. Aside from income tax, this may help with medical expenses and more.
  • Contribute regardless of your income level as long as your plan allows it.
  • No immediate tax benefit. When struggling to save money or you can’t afford to maximize matching, a pre-tax contribution could make saving easier.

Traditional Pre-Tax 401(k):

  • Current-year reduction in taxable income. That’s especially helpful in high-income years.
  • You’ll have to pay tax eventually.
  • RMDs may force you to withdraw more than you want for taxation, although you can reinvest or donate funds.

Keep in mind that you can’t necessarily predict anything. Your income might change, or tax rates could change—but even bigger shifts could occur. For example, it’s possible that the U.S. could move toward sales or consumption taxes as opposed to relying heavily on income taxes. That might not be likely, but anything is possible.

When to Choose Roth 401(k)

Roth 401(k) contributions might make sense in the following situations:

  • You are in a relatively low income tax bracket due to a low income or specific events (temporarily out of the workforce, for example).
  • You expect higher tax rates later in life, whether that’s due to a higher income or different tax rules.
  • You are concerned about means testing or the effects of a high income: IRMAA, increased Social Security taxation, the loss of certain deductions and credits, etc.
  • You are a supersaver and want to maximize tax-favored dollars. You have plenty of cash flow, you’re debt-free, you’ve taken advantage of every other opportunity (HSAs when available, etc.), and your priority is to set aside tax-free money for yourself or loved ones.
  • You want to diversify the tax status of your money if you’re heavy on pre-tax money. If you spend your entire life putting money in pre-tax accounts, you could have challenges later in life. Those may be nice problems to have, but you may be able to improve things somewhat.

When to Choose Traditional 401(k)

Traditional pre-tax contributions could make sense in the following situations:

  • You have a relatively high income, and you expect to be in lower tax brackets later in life.
  • You’re not overly concerned about income later, and you don’t foresee issues with IRMAA, RMDs, healthcare premiums, etc.
  • You prefer certainty—the “bird in the hand.”
  • You expect high medical expenses that might be deductible later in life.