Should You Save for Retirement in a 401(k) or Roth IRA?
All things being equal, saving the maximum into a Roth option provides the greatest chance of high, after-tax income during retirement.

Q: My son is 23 and is working full-time for what I consider to be a pretty decent salary. He’s always been a bit of a saver, and he recently asked me if I thought he should contribute to his employer’s 401(k) plan, or if he should instead save in a Roth IRA? What is your advice?
A: Your son is wise to start saving at such a young age. For most of us, it’s difficult to get into the habit of putting money away, so it’s great if we can begin when we have our first “real” job.
The question of whether to use a pre-tax savings plan, such as a 401(k), 403(b), 457, or a traditional IRA, or to use a Roth option, is not an easy one to answer. That’s because there are so many variables that it’s impossible to predict future outcomes.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Your son’s employer-sponsored retirement plan will provide him with a current tax deduction on whatever he contributes, up to a maximum of $18,000. The money invested within the plan will grow tax-deferred for decades, but when he reaches retirement age, everything he withdraws will be taxed as ordinary income, and at whatever the rate that ordinary income is being taxed at in the future.
These tax-deductible retirement plans have been around for decades and have been endorsed by many experts based upon the premise that most people will find themselves in a lower tax bracket once they retire. With that in mind, it would seem to make sense to take that tax deduction today and defer paying the government its share until later.
The problem with this argument is that many of the best savers actually find that they are not in a lower tax bracket during retirement. The fact is that, because they’ve saved and invested well, many retirees end up paying much more in taxes once they leave the workforce than they did during their working years.
The Roth option—whether it’s a Roth 401(k) through his employer or a Roth IRA funded outside of work—takes a different approach. A saver receives no tax break for the funds deposited today, but the money is withdrawn tax-free during retirement.
All things being equal, saving the maximum into a Roth option would provide the greatest chance of high, after-tax income during retirement, and here’s why: The problem with traditional retirement plans that offer a tax deduction is not the plan itself, exactly, it’s with the behavior of the person who is contributing to the plan. That’s because the tax savings provided by the plan is rarely set aside for the future. Instead, human nature, being what it is, means that the higher take-home pay usually gets spent.
Here’s an example: Two people work for the same employer. One contributes the maximum into the traditional 401(k), while the other contributes the maximum into the Roth 401(k). Both amass $1 million in their plans and then retire.
So who is better off? The person who used the traditional 401(k) had a larger paycheck each month because of the tax break (but as mentioned earlier, she will, in all likelihood, spend that extra take home pay), and so she now has $1 million that will be fully taxable when she withdraws and spends the money. With that in mind, that million-dollar plan may be worth “only” $750,000 once the taxes have been paid.
The person who used the Roth 401(k) may not have had as large as a paycheck while working, but she now has a retirement plan that will be free of taxes. The $1 million in retirement savings will not be degraded in any way.
So, to answer your question, because your son has begun to save so early in his career, I think the Roth is a better option.
The caveat is that no one can predict what tax rates will be like in the future. Will we move to a flat tax? Will Congress adopt a lower income tax burden along with a national sales tax? Will Roth withdrawals be taxable for higher income retirees?
Because it’s impossible to know what will happen, I believe it’s prudent to diversify tax strategies in the same manner one diversifies investments. Ideally, it would be great to reach retirement with some funds in a traditional 401(k) or IRA, some money in a Roth, funds in a brokerage account, perhaps some real estate, and so on. (Of course, this level of diversification is the reason why a good saver will likely find his or herself in a higher tax bracket once they retire: more income from more sources.)
So, given all of the uncertainties of the future, rather than choose one retirement plan option, I would recommend your son contribute equally to both the traditional 401(k) as well as a Roth IRA. He has roughly 40 years until he reaches retirement age and, no doubt, a lot will change by then. With that in mind, having some diversity with his tax-advantaged retirement plans seems the best route to follow.
Scott Hanson, CFP, answers your questions on a variety of topics and also co-hosts a weekly call-in radio program. Visit www.MoneyMatters.com to ask a question or to hear his show. Follow him on Twitter at @scotthansoncfp.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Scott Hanson, CFP, answers your questions on a variety of topics and also co-hosts a weekly call-in radio program. Visit HansonMcClain.com to ask a question or to hear his show. Follow him on Twitter at @scotthansoncfp.
-
Stock Market Today: Have We Seen the Bottom for Stocks?
Solid first-quarter earnings suggest fundamentals remain solid, and recent price action is encouraging too.
By David Dittman
-
Is the GOP Secretly Planning to Raise Taxes on the Rich?
Tax Reform As high-stakes tax reform talks resume on Capitol Hill, questions are swirling about what Republicans and President Trump will do.
By Kelley R. Taylor
-
Social Security Is Taxable, But There Are Workarounds
If you're strategic about your retirement account withdrawals, you can potentially minimize the taxes you'll pay on your Social Security benefits.
By Todd Talbot, CFP®, NSSA, CTS™
-
Serious Medical Diagnosis? Four Financial Steps to Take
A serious medical diagnosis calls for updates of your financial, health care and estate plans as well as open conversations with those who'll fulfill your wishes.
By Thomas C. West, CLU®, ChFC®, AIF®
-
To Stay on Track for Retirement, Consider Doing This
Writing down your retirement and income plan in an investment policy statement can help you resist letting a bear market upend your retirement.
By Matt Green, Investment Adviser Representative
-
How to Make Changing Interest Rates Work for Your Retirement
Higher (or lower) rates can be painful in some ways and helpful in others. The key is being prepared to take advantage of the situation.
By Phil Cooper
-
Within Five Years of Retirement? Five Things to Do Now
If you're retiring in the next five years, your to-do list should contain some financial planning and, according to current retirees, a few life goals, too.
By Evan T. Beach, CFP®, AWMA®
-
The Home Stretch: Seven Essential Steps for Pre-Retirees
The decade before retirement is the home stretch in the race to quit work — but there are crucial financial decisions to make before you reach the finish line.
By Mike Dullaghan, AIF®
-
Three Options for Retirees With Concentrated Stock Positions
If a significant chunk of your portfolio is tied up in a single stock, you'll need to make sure it won't disrupt your retirement and legacy goals. Here's how.
By Evan T. Beach, CFP®, AWMA®
-
Before You Invest Like a Politician, Consider This Dilemma
As apps that track congressional stock trading become more popular, investors need to take into consideration some caveats.
By Ryan K. Snover, Investment Adviser Representative