Roth 401(k) vs. Traditional 401(k): Which One Fits Your Situation

The core difference: when you pay taxes

A traditional 401(k) lets you put money in before taxes are taken out. You pay taxes later, when you withdraw the money in retirement. A Roth 401(k) takes taxes out now, so the money you withdraw later is tax-free.

Both are offered through your employer, both have the same contribution limits, and both let your money grow without being taxed on the gains while it sits in the account. The choice comes down to whether you think your tax rate will be higher now or in retirement.

Key Takeaways

• Traditional 401(k) contributions reduce your taxable income this year; Roth contributions do not, but withdrawals in retirement are tax-free.
• If you expect to be in a lower tax bracket in retirement, traditional may save you more money overall; if you expect to be in a higher bracket, Roth may be better.
• Roth 401(k)s have no required minimum distributions at age 73, while traditional 401(k)s do, which matters if you do not need the money.
• You can only contribute to a Roth 401(k) if your employer offers one; traditional 401(k)s are far more common.
• Some employers match contributions to either type equally; others match only to traditional, so check your plan documents.

How traditional 401(k) contributions work

Money goes into your traditional 401(k) before your employer withholds federal income tax. If you contribute $500 per paycheck, your taxable income that year drops by $6,000 (if you contribute monthly). You pay less in taxes right now.

When you turn 73, the IRS requires you to start taking money out—these are called required minimum distributions, or RMDs. You pay income tax on every dollar you withdraw. If you do not need the money, you still have to take it out and pay the tax.

This approach makes sense if you expect to earn less in retirement than you do now, or if you want to lower your taxable income this year for a specific reason.

How Roth 401(k) contributions work

Money goes into your Roth 401(k) after taxes have already been taken out. If you contribute $500 per paycheck, you pay income tax on that $500 now, and your take-home pay is reduced by the full amount. Your taxable income this year does not drop.

When you withdraw money in retirement, you owe no income tax on it—not on the contributions you made, and not on the growth. There are no required minimum distributions, so you can leave the money untouched if you do not need it.

This approach makes sense if you expect to be in a higher tax bracket in retirement, or if you want to leave tax-assistance programs to your heirs, or if you simply prefer knowing exactly what you will owe in taxes later.

Employer matching and which account gets it

Most employers match a percentage of what you contribute—often 3 to 6 percent of your salary. The match is assistance programs, and it matters which account it goes into.

If your employer offers both traditional and Roth 401(k)s, check your plan documents or ask your benefits administrator: does the match go into the same account type you chose, or does it always go into traditional? Some employers put the match into traditional regardless, which means you get a mix of both account types even if you chose only Roth contributions.

The match itself is always taxed as income when you withdraw it, even if it lands in a Roth account. Only your own contributions get the Roth tax-free treatment.

Income limits and who can contribute

There are no income limits for either traditional or Roth 401(k)s through your employer. You can earn $50,000 or $500,000 and contribute to either one, as long as your employer offers it.

This is different from Roth IRAs, which have income limits that phase out at higher earnings. A 401(k)—whether traditional or Roth—is available to anyone with access to the plan, regardless of how much they make.

Contribution limits and catch-up contributions

For 2024, you can contribute up to $23,500 to a 401(k), whether traditional or Roth. If you are 50 or older, you can add an extra $7,500 per year as a catch-up contribution, for a total of $31,000.

These limits apply to the total across both account types combined. If your employer offers both and you contribute to each, the $23,500 limit covers contributions to both accounts added together—you cannot put $23,500 into traditional and another $23,500 into Roth.

Limits change each year based on inflation. Your employer or benefits administrator can tell you the current year's limit.

Withdrawals before retirement and the pro-rata rule

If you withdraw money from a traditional 401(k) before age 59½, you usually owe income tax on it plus a 10 percent early withdrawal penalty. Some exceptions exist—hardship withdrawals, substantially equal periodic payments, and a few others—but they are narrow.

Roth 401(k)s have the same early withdrawal penalty on the earnings (the growth), but you can withdraw your own contributions without penalty at any time. The earnings are still penalized if you are under 59½.

There is also a pro-rata rule that affects people with both traditional and Roth accounts: if you have a traditional IRA or traditional 401(k) and you want to do a Roth conversion, the IRS counts all your traditional accounts together to calculate how much of the conversion is taxable. This can make conversions more expensive than expected if you have multiple accounts.

Frequently Asked Questions

Can I switch from traditional to Roth mid-year?

Some employers allow you to change your election during the year, but most require you to wait until the annual open enrollment period. Check with your benefits administrator about when changes are allowed. If you switch, future contributions go to the new account type, but money already in the traditional account stays there.

What happens to my Roth 401(k) if I leave my job?

You can roll it into a Roth IRA at another financial institution, or roll it into your new employer's plan if they offer a Roth 401(k). Rolling into a Roth IRA gives you more investment choices and no required minimum distributions. Rolling into a new employer plan keeps it as a 401(k).

Do I have to take required minimum distributions from a Roth 401(k)?

Yes, while the account is in your name. However, you can roll the Roth 401(k) into a Roth IRA after you leave the job, and Roth IRAs have no required minimum distributions. This is a common strategy for people who do not need the money in retirement.

Which one saves me more money?

It depends on your tax rate now versus your expected tax rate in retirement. If you are young and expect to earn more later, Roth may be better. If you are near retirement and expect to earn less, traditional may be better. A tax professional can model both scenarios using your specific situation.

Can my employer match contributions to a Roth 401(k)?

Yes, but the match itself is always taxed as income when you withdraw it. Only your own Roth contributions come out tax-free. Ask your benefits administrator where the match goes in your plan.