Should I do a Roth or traditional 401(k)?
In one paragraph
Choose Roth if current tax rates are lower than expected retirement rates; choose traditional if the reverse is true. Early-career earners typically benefit more from Roth, while high earners approaching peak income years often get more value from traditional pre-tax contributions.
What this actually means
The Roth versus traditional 401(k) decision ultimately comes down to one variable: whether tax rates will be higher now or later. Both accounts grow tax-free while invested, but they differ on when taxes are paid.
With a traditional 401(k), contributions reduce taxable income today. A worker in the 22% bracket who contributes $10,000 saves $2,200 in taxes this year. Withdrawals in retirement are taxed as ordinary income. If that retiree lands in a 12% bracket, they've permanently arbitraged the difference.
With a Roth 401(k), contributions come from after-tax dollars. There's no upfront deduction. But qualified withdrawals in retirement — including decades of compounded growth — are completely tax-free. For someone who expects to be in a higher bracket at retirement, or who simply wants tax diversification, Roth wins.
Several factors tilt the math. Age matters: a 25-year-old with 40 years of compounding ahead gets more leverage from tax-free growth. Income trajectory matters: an early-career professional likely earns less now than they will at peak. Future tax policy matters: rates have historically moved in both directions, and no one can predict them with confidence 30 years out. State taxes matter: some states exempt retirement income entirely, which changes the effective rate comparison.
A middle path works for many savers: split contributions between both account types. This creates tax diversification — the flexibility in retirement to draw from pre-tax or post-tax buckets depending on what's most efficient in any given year. It also hedges against uncertainty in future tax policy.
High earners above the Roth IRA income limits can still access Roth 401(k)s without restrictions, since 401(k) Roth contributions don't carry income limits. Employer matching contributions, however, always go into the traditional pre-tax side regardless of which type is chosen.
The decision is less permanent than it appears. Contributions can be split, rebalanced annually, or converted (via Roth conversion) in future years as circumstances change.
