Choosing between a Roth 401(k) and a traditional 401(k) is one of the most important tax-related decisions plan participants make. While both offer valuable opportunities to grow retirement savings, the tax implications of pre-tax vs. post-tax contributions play a key role in determining which option is best for you. Here, Meghan Hannon, CRPS®, CPFA®, Partner and Head of Retirement Plan Consulting, breaks down the differences between the two account types and how to align your retirement savings strategy with your broader financial goals. Below is a quick comparison of the two account types:
- Traditional 401(k): Contributions are made pre-tax, reducing your taxable income today. You’ll pay income taxes when you withdraw the funds in retirement.
- Roth 401(k): Contributions are made after-tax, meaning you pay taxes now but enjoy tax-free withdrawals on qualified distributions in retirement.
Understanding the long-term tax impact of each option is essential for optimizing your overall retirement strategy.
The Tax Trade-Off: Pay Now or Later?
The core difference between Roth and traditional 401(k) plans comes down to when you pay taxes.
- If you expect your tax rate to be lower in retirement, a traditional 401(k) may be more advantageous.
- If you anticipate a higher future tax rate, due to income growth, tax law changes, or other factors, a Roth 401(k) can help you lock in today’s lower rates and avoid taxes later.
According to the IRS, tax-deferred contributions to traditional 401(k)s lower your adjusted gross income now, which may also impact eligibility for other tax benefits.¹ In contrast, Roth contributions offer no immediate deduction but can lead to significant tax savings, especially if your investments grow substantially.
Income Level and Retirement Goals: Which 401(k) Is Best for You?
Your current income level, expected future earnings, and retirement goals should guide your decision.
A Roth 401(k) may be a good fit if:
- You’re in a lower tax bracket today and expect higher earnings later.
- You’re early in your career and want decades of tax-free investment growth.
- You value tax-free withdrawals for estate planning or flexibility in retirement.
A traditional 401(k) may be preferable if:
- You’re in a higher tax bracket now and want to reduce taxable income.
- You plan to be in a lower bracket in retirement.
- You want the immediate benefit of upfront tax savings.
Some plans also allow contributions to both types of accounts, offering a blended tax strategy. In 2025, the combined annual contribution limit remains $23,500 (or $31,000 with catch-up contributions for those age 50 and older).²
Helping You Get There…
Deciding between a Roth 401(k) and a traditional 401(k) isn’t just about taxes; it’s about aligning your choices with your income trajectory, retirement goals and personal preferences. Taking the time to evaluate your current situation and where you’re headed can help you discern the path that best supports your financial future. Whether early in your career or nearing retirement, now is the time to review your strategy. Connect with your plan advisor or contact Boulay to learn how we can help you build a balanced approach for your retirement savings.