Traditional 401(k), Roth 401(k) and How to Read the Room.
A few weeks ago, I attended a small party and found myself in one of those situations where you overhear a conversation and can’t help but want to chime in. I was standing with a drink in my hand, the music was playing, and my wife was talking to me—yet my concentration was somewhere else. One woman (whom I had never met) was telling her friend that she was starting a new job and had the option of contributing to either a Roth 401(k) or a traditional 401(k). She wasn’t sure which one to choose. Her friend hesitated and admitted, "I think Roth is better, but I don’t know why."
I know—the right thing to do would’ve been to keep listening to my wife. But I couldn’t help myself! A debate played in my head: “Should I step in, introduce myself as a financial planner, and offer some clarity? Or should I just keep quiet and enjoy my drink?” The last thing I wanted was to come across as nosy or, worse, like I was trying to sell something. Normally, I would choose the latter. But this time, I figured a little clarity wouldn’t hurt.
“I’m a financial planner. I hope you don’t mind me jumping in,” I said. “That’s actually a great question, and the answer depends on a few things.”
What’s the Difference?
At its core, the decision between a Roth 401(k) and a traditional 401(k) comes down to when you pay taxes on your money.
With a traditional 401(k), your contributions go in before taxes, which lowers your taxable income today. The money grows over time, and you’ll pay taxes later when you withdraw it in retirement.
With a Roth 401(k), you contribute after taxes, meaning there’s no tax break today, but your money grows tax-free, and you won’t owe taxes when you take it out in retirement.
So Which One Should You Pick?
I explained that there’s no universal “best” option, but here are a few things to consider:
1. Your Tax Rate Today vs. In the Future
If you think you’re in a lower tax bracket now than you’ll be in retirement, a Roth 401(k) might be a better choice. You’re locking in today’s lower tax rate and avoiding taxes on your withdrawals later.
If you’re earning a high salary and expect your tax rate to be lower in retirement, a traditional 401(k) could help you save on taxes today.
If you’re unsure, think about whether you’d rather pay taxes now at a known rate or later at an unknown rate.
2. Do You Like Certainty?
With a Roth, you know exactly how much you’re paying in taxes upfront.
With a traditional 401(k), you don’t know what tax rates will be in the future, so your withdrawals could be taxed at a higher rate than you expect.
If you don’t want surprises in retirement, Roth might be the better choice.
3. How Long Until You Retire?
If you’re early in your career, the Roth 401(k) might be a strong choice because you have decades of tax-free growth ahead of you.
If you’re closer to retirement, the traditional 401(k) could provide more immediate tax savings when you might need them most.
Younger savers often benefit more from Roth accounts because they allow decades of tax-free growth.
4. Do You Want Flexibility?
Roth 401(k)s don’t have required minimum distributions (RMDs) if you roll them into a Roth IRA. That means you can leave the money to grow as long as you want.
Traditional 401(k)s require you to start withdrawing money (and paying taxes on it) once you reach a certain age.
If you plan to work past retirement age or want to leave assets to heirs, the Roth option could provide more flexibility.
A Practical Approach
I could tell she was still processing all of this, so I added, “If you’re still not sure, some people split their contributions between both options, if their employer’s plan allows it. That way, they get a mix of taxable and tax-free income in retirement, giving them more flexibility.”
What If Your Employer Offers a Match?
One thing that sometimes confuses people is how employer matching contributions work. If your employer offers a 401(k) match, those matching funds usually go into a traditional 401(k) account, even if your personal contributions go into a Roth. While the SECURE 2.0 Act (passed in 2022) allows employers to make matching contributions to employees’ Roth 401(k)s, not all employers have adopted this change yet. It’s best to check with your employer.
If you’re lucky enough to have an employer match, always contribute at least enough to get the full match—it’s free money! After that, deciding between Roth and traditional is about what works best for your situation.
What If You Plan to Retire Early?
If you’re planning to retire before age 59½, you might want to think about how you’ll access your retirement funds. With a traditional 401(k), you typically owe a penalty for withdrawing money before this age (unless you qualify for an exception). Roth 401(k)s offer a bit more flexibility—while earnings are subject to penalties, you can withdraw your contributions (the money you put in, not the growth) at any time, tax-free and penalty-free.
Other Considerations
Estate Planning – Roth 401(k)s that are rolled into a Roth IRA don’t have required distributions, so they can be a great tool for passing wealth to heirs tax-free.
State Taxes – Some states have no income tax, while others have high rates. If you’re moving to a lower-tax state in retirement, a traditional 401(k) might be a better choice.
Withdrawal Strategies – Retirees with a mix of both Roth and traditional accounts have more options for managing their tax bills in retirement.
Making the Choice Easier
If you're feeling stuck, here are a few general rules of thumb:
If you're young or in a lower tax bracket → Roth 401(k)
If you're in a high tax bracket now but expect a lower one later → Traditional 401(k)
If you like flexibility in retirement → Roth 401(k)
If you're unsure, splitting your contributions can give you the best of both worlds
After breaking all this down, the woman at the party smiled and thanked me. But I could tell she was still processing everything, and I wasn’t entirely sure she fully understood all the details. Her friend nodded along, looking equally deep in thought.
Sometimes, the best financial conversations happen when you least expect them—though this one felt like it might not have been one of them 😀.
Maybe I Came on Too Strong...
Deciding between a Roth 401(k) and a traditional 401(k) doesn’t have to be complicated. It’s about understanding where you are today and where you think you’ll be in the future. And if you’re still unsure, contributing to both could give you the best of both worlds.
I wrapped up my impromptu financial planning session and offered to answer any other questions she might have. She smiled politely, but I could tell she was a little overwhelmed—like I had just handed her a finance textbook instead of a simple answer. Maybe I should have read the room a bit better... or maybe I should’ve been listening to my wife instead. Lesson learned!
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