To Roth 401(k) or not to Roth 401(k)?
Which is better: more money in your regular paycheck or more tax-free cash in your retirement? It’s an important question only you can answer.


Here’s a finding I did NOT expect: According to a 2017 research paper at Harvard Business School, employees who have the option to contribute to a Roth 401(k) instead of a traditional 401(k) tend to contribute the same amount to either account. Given that a Roth 401(k) usually results in more money taken out of your paycheck every week or month than a traditional 401(k), that’s unexpected!
Traditional 401(k) contributions are made on a pre-tax basis while Roth 401(k) contributions are made post-tax. So, assuming a given level of cash flow available, most of the time contributions to a traditional 401(k) will be more affordable than contributions to a Roth 401(k) because traditional plans drive your annual taxable income lower. You’ll still have to pay taxes on the contributions later when you retire, but the “taxable event” is deferred.
Take the case of Priya, a 49-year-old single mom. She makes $135,000 a year and lives alone with her son. Not counting her employer’s match, Priya saves $350 per pay period in her traditional 401(k), totaling $9,100 a year. Absent other considerations, her $9,100 contribution reduces her annual taxable income from $135,000 to $125,900. As a result, since her taxable income is less, she will pay less income taxes.

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.
What if Priya were to switch her contributions to her company’s Roth 401(k)? She is considering contributing the same amount: $9,100. However, because contributions to a Roth are post-tax, they would no longer reduce Priya’s taxable income. Thus, she would pay taxes on $135,000 instead of $125,900. Hence, Priya would end up owing more taxes for the year.
A no-brainer for the traditional 401(k), right? Wrong. Roth 401(k)s provide one major advantage. If Priva switched to the Roth and maintained her contribution level, she might end up with more income in retirement as Roth 401(k) distributions in retirement are tax-free, whereas traditional 401(k) distributions are taxed as income. However, switching her contribution to the Roth would be at the expense of her current cash flow. Can Priya afford it?
What if she would reduce her Roth contribution to keep her current cash flow constant? In that case, it is not clear that Priya’s after-tax income in retirement would be higher or lower with a Roth 401(k) than with a traditional 401(k). Answers would require further analysis of her situation.
It’s important to remember that neither Roth 401(k)s nor Roth IRAs are tax-free: they are merely taxed differently. That makes the decision to invest in one or the other an important financial-planning decision: Employees need to understand the benefits and drawbacks of both approaches to make an informed decision that balances current spending desires with future income needs.
According to John Beshears, the lead author of the Harvard study, one possible explanation for his finding is that people are confused about the tax properties of the Roth. Another possibility could be that people have greater budget flexibility than they give themselves credit for. Either way, employees should seek additional support before making this very important decision.
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.

Chris Chen CFP® CDFA is the founder of Insight Financial Strategists LLC, a fee-only investment advisory firm in Newton, Mass. He specializes in retirement planning and divorce financial planning for professionals and business owners. Chris is a member of the National Association of Personal Financial Advisors (NAPFA). He is on the Board of Directors of the Massachusetts Council on Family Mediation.
-
Think a Repeal of the Estate Tax Wouldn't Affect You? Wrong
The wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
In Your 50s? We Need to Talk About Long-Term Care
Many people don't like thinking about long-term care, but most people will need it. This financial professional recommends planning for these costs as early as possible to avoid stress later.
-
Social Security Pop Quiz: Are You Among the 89% of Americans Who'd Fail?
Shockingly few people have any clue what their Social Security benefits could be. This financial adviser notes it's essential to understand that info and when it might be best to access your benefits.
-
Such Attractive Yields in High-Grade Munis Are Rare and May Not Last Long
According to this munis expert, the last time munis were this cheap was a brief period in 2023. If you kicked yourself for missing out then, you have a second chance now.
-
Financial Analyst Sees a Bright Present for Municipal Bond Investors
High-tax-bracket investors have an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.
-
I'm an Insurance Pro: How Not to Get Dumped by Your Insurance Agent
Your insurance agent or broker might show you the door if you do any of these five things. Being a good customer is about more than paying your bill on time.
-
Two Estate Planning Issues You Should Never Overlook
This estate planning attorney explains why proper asset titling and beneficiary designations make a big difference when it's time to transfer your wealth.
-
The Four D's That Could Force You to Sell Your Business
Business owners (or their heirs) can be rushed into a sale of their company if they haven't planned for a major change in circumstances — or the four D's.