Traditional vs. Roth 401(k): Which One Is Right for You?

Written by Chad Conner, July 2025

When it comes to saving for retirement, one of the best tools available is a 401(k) plan. But within that, you often have two choices: a Traditional 401(k) and a Roth 401(k). While both help you grow your savings, they differ in how and when you pay taxes. Understanding these differences can help you make a smart decision for your financial future.

Traditional 401(k) vs. Roth 401(k): The Key Difference

The main distinction between a Traditional 401(k) and a Roth 401(k) comes down to when you pay taxes:

• Traditional 401(k): You contribute pre-tax dollars, which reduces your taxable income now. However, you pay taxes on withdrawals during retirement.

• Roth 401(k): You contribute after-tax dollars, meaning you don’t get an immediate tax break. However, your withdrawals (including earnings) in retirement are tax-free, as long as you meet certain conditions.

Employer Matches and Tax Treatment

If your employer offers a 401(k) match, it’s important to understand how that money is treated. Most employer matching contributions go into a Traditional 401(k), even if you contribute to a Roth 401(k). This means that while your Roth contributions will grow tax-free, your employer's match will be tax-deferred and subject to taxes when withdrawn in retirement.

Because policies can vary, it's always a good idea to check with your employer to understand how they handle matching contributions and how they impact your retirement strategy.

Benefits of a Roth 401(k)

A Roth 401(k) offers several advantages that make it an attractive option for many savers:

1. Tax-Free Growth and Withdrawals

One of the biggest benefits of a Roth 401(k) is that your money grows tax-free. When you withdraw it in retirement, you won’t owe any taxes—no matter how much your investments have grown over the years.

2. More Flexibility in Retirement

Because Roth 401(k) withdrawals are tax-free, they give you more control over your taxable income in retirement. This can help you manage tax brackets, or avoid taxes on Social Security benefits.

3. Avoid Required Minimum Distributions (RMDs)

Roth 401(k)s and Roth IRAs are not subject to Required Minimum Distributions (RMDs) like you would face with a Traditional 401(k). This means your money can continue growing tax-free for as long as you want.

Benefits of a Traditional 401(k)

A Traditional 401(k) offers key advantages that can benefit many savers, especially during their working years:

1. Immediate Tax Savings

One of the biggest benefits of a Traditional 401(k) is the upfront tax deduction. Contributions are made pre-tax, which can lower your taxable income and potentially reduce the amount you owe to the IRS each year.

2. Lower Tax Bracket Now, Higher Later

If you expect to be in a lower tax bracket in retirement than you are today, a Traditional 401(k) allows you to defer taxes until then—potentially paying less in taxes overall.

3. Higher Contribution Limits Than IRAs

Like the Roth 401(k), a Traditional 401(k) offers higher annual contribution limits than Traditional IRAs, giving you more room to build retirement savings in a tax-advantaged way.

4. Employer Contributions Grow Tax-Deferred

Any employer match or contribution is also tax-deferred, which means both your contributions and your employer’s can grow without being taxed until withdrawal.

The Best Strategy? Consider a Mix

If you’re unsure which option is best, you can contribute to both a Traditional and a Roth 401(k). This allows you to diversify your tax exposure and take advantage of both tax benefits. Just remember that any employer match will likely be in the Traditional 401(k) bucket, so plan accordingly.

Final Thoughts

Both Traditional and Roth 401(k) plans offer valuable tax advantages, and the right choice depends on your individual financial situation. A Roth 401(k) provides tax-free growth and withdrawals since taxes are paid when you contribute, while a Traditional 401(k) helps lower taxable income today by deferring taxes until retirement. No matter which you choose, the most important step is to start saving for retirement as early as possible.

What’s your retirement savings strategy? Schedule your appointment today to discuss with one of our advisors!

Contributions to a traditional 401(k) may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

A Roth 401(k) offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.