Traditional vs. Roth 401(k): A simple guide

The traditional pre‑tax 401(k) and Roth 401(k) each offer distinct tax advantages, which often leads to the question: “Which one is best for me?” Actually, these are not separate retirement accounts, but simply different ways to contribute to your 401(k). Let’s break it down further.

Differences at a glance

Pre‑tax (traditional) 401(k):

• Contributions go in before taxes.
• You lower your taxable income today.
• Taxes are deferred until retirement.
• Both contributions and investment earnings are taxed later as ordinary income.

Roth 401(k):

• Contributions are made with after‑tax dollars.
• You do not reduce your taxable income today.
• Qualified withdrawals in retirement are 100% tax‑free (contributions + growth).
• Taxes are paid up front, not later.

Deciding which approach is right for you

This is a highly individualized decision depending on your unique situation. And if your employer offers the Roth option, you can contribute to both pre‑tax and Roth at the same time. Regardless, we’ve put together a few simple questions to ask yourself as you plan.

1. Do I expect my tax bracket to be higher now or in retirement?

• Higher now: Pre‑tax may be better (delay taxes until retirement, when rates may be lower).
• Higher later: Roth may be better (pay taxes now, potentially at a lower rate).

Consider:

• Expected salary growth
• Career trajectory
• Other retirement income sources (pensions, Social Security, rental income, etc.)

2. How valuable is lowering my taxable income today?

Ask yourself:

• Do I benefit from lowering my Adjusted Gross Income (AGI)?
• Will a lower AGI help with:
  • Financial aid?
  • ACA subsidies?
  • Child tax credits?
  • Phaseouts for deductions or credits?

If lowering taxable income now matters, pre‑tax may be the better tool.

3. How many years do I have until retirement?

Time horizon matters.

• Long time until retirement: Roth growth can be very powerful.
• Closer to retirement: Pre‑tax tax savings today may matter more.

4. Will I want tax flexibility in retirement?

Ask:

• Do I want both taxable and tax‑free “buckets”?
• Would controlling my taxable income each year benefit me?

Many people choose a mix for this reason.

5. Will required minimum distributions (RMDs) matter to me?

• Traditional 401(k) requires RMDs at age 73.
• Roth 401(k) does not require RMDs starting in 2024 (thanks to SECURE Act 2.0).

If minimizing forced withdrawals matters, Roth may be preferable.

6. How stable or uncertain is my future income?

If income is unpredictable:

• Expect income to increase: Roth now.
• Expect income to decrease (retiring soon, career change): Pre‑tax now.

7. What do I think tax rates will be in the future?

No one can predict tax policy, but consider:

• Do I think tax rates will rise?
• Do I prefer to lock in today’s known rate?

Roth contributions lock in taxes now.

8. How important is maximizing my take‑home pay today?

• Pre‑tax contributions lower taxes now: higher paycheck.
• Roth contributions cost more today: lower paycheck, but tax‑free later.

If cash flow is tight, pre‑tax may be easier.
If it’s comfortable, Roth may be a good long‑term fit.

A simple rule of thumb

• Early career: Roth often wins
• Late career/high income: Pre‑tax often wins
• Middle career or unsure: A mix can provide balance and flexibility

We’re here to help

If you need guidance, UBT has a team of dedicated Retirement Plan Educators ready to answer your questions and help you make informed decisions.