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

Investing in a Roth 401(k) vs a 401(k) all boils down to taxes. It's the norm today for working Americans to save in either type of 401(k) plan as pensions fade away. But 401(k)s come in two distinct flavors. And that means savers must do a tale-of-the-tape comparison of the two options: traditional vs. Roth 401(k).

Both 401(k)s are “great retirement savings vehicles,” says Nilay Gandhi, a senior wealth advisor at Vanguard.

But which one is right for you?

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Roth 401(k) vs 401(k) — how they are the same

Let’s start with what the two 401(k)s have in common.

• Contributions to both traditional and Roth 401(k)s — plus any gains you earn — grow tax-free.
• Both types of 401(k)s are also eligible for employer matching contributions.
• The contribution limits remain the same, with one change in 2026.
  • Under 50: The maximum amount you can contribute to your 401(k) plan in 2026 has increased to $24,500, up from $23,500 for 2025.
  • Age 50+: If you're age 50 or older, the standard catch-up contribution limit rises to $8,000 in 2026 (up from $7,500 in 2025). That's a total allowable contribution of $32,500 in 2026, up from $31,000 last year.
  • Age 60 - 63: Under SECURE 2.0 rules, if you're age 60–63, you qualify for a higher "super catch-up" limit of $11,250, for a total of $35,750.
  • New for 2026: If you are age 50 or older and earn $145,000 or more, you must make any catch-up contributions to a Roth 401(k), not a traditional 401(k).

The big difference between the two types of 401(k)s is their tax treatment — or when you pay taxes to the IRS. With a traditional 401(k) you postpone taxes to a later date, whereas with the Roth 401(k) you pay the taxes upfront.

“It’s a tradeoff,” said Rob Williams, managing director of financial planning for Charles Schwab. “You’re either taxed upfront or taxed when you withdraw the money.” (The IRS allows penalty-free withdrawals from both traditional 401(k)s and Roth 401(k)s after age 59-1/2).

Differences between Roth and traditional 401(k)s

Traditional 401(k)s are funded with pre-tax dollars deducted from your paycheck, netting you an immediate tax break. “If you put money in a traditional 401(k), that income is not included in your taxes,” said Williams. “It’s an upfront tax benefit.” So, if you earn $100,000 and you contribute $10,000 to your 401(k) this year, your taxable income will fall to $90,000. But there’s no free lunch: you’ll pay income taxes at your ordinary income rate when you withdraw the money in retirement. You will also have to take required minimum distributions (RMDs), which means you'll have less control over when and how much you withdraw.

In contrast, Roth 401(k)s are funded with dollars that have already been taxed. The power of a Roth 401(k), though, is that you can make tax-free withdrawals in retirement, and there are no RMDs. And while Roth 401(k)s, which are a close relative of the Roth IRA, are less frequently used than traditional 401(k)s, over 80% of 401(k) plans managed by Fidelity Investments offer a Roth 401(k) option. However, just 17.5% of Fidelity 401(k) participants contribute to a Roth 401(k).

Traditional 401(k) vs Roth 401(k) summary

How to choose between a Roth and traditional 401(k)

So, how do you weigh the two choices? What key factors should you be looking at?

When deciding between a traditional vs. Roth 401(k), you’ll need to identify your current tax rate and guesstimate your potential tax rate in retirement. Other factors that could impact your decision include what your income will look like in retirement, your cash flow situation during your saving years, whether you’re expecting a big inheritance that can put you in a higher tax bracket later in life, and how long you’ve had your Roth 401(k).

The last point is key for those who choose the Roth 401(k) option later in life. The reason? You won’t be eligible for a penalty-free qualified withdrawal of the earnings in your Roth 401(k) account until you’ve had the account open for at least five years.

It's all about tax brackets now and later.

The most critical piece of information, though, relates to your personal tax situation, says Gandhi. “Do you believe you will be in a higher or lower tax bracket in the future (e.g., during retirement) than where you’re at today?” said Gandhi.

The answer to that question is crucial because of the different tax treatments of a traditional vs. a Roth 401(k).

The rule of thumb is if you think you’ll be in a lower tax bracket in retirement than you are now, then a traditional 401(k) makes more sense. Why? You’ll pay less in taxes on your 401(k) withdrawals in retirement. Plus, you’ll enjoy a tax deduction in the here and now when tax rates are higher.

In contrast, if you believe your tax bracket will be higher in retirement (which is often the case for younger 401(k) savers who earn smaller salaries or those who think Congress will boost tax rates in the future), then a Roth 401(k) is the way to go. The reason: Since you don’t pay taxes on Roth 401(k) withdrawals, you’re better able to minimize taxes on your other forms of income and avoid jumping up to a higher tax bracket.

“If you’re in the highest 37% tax bracket today and you think you’re going to be in the 22% tax bracket when you retire, it could be advantageous to go with the pre-tax traditional 401(k) today,” said Gandhi. In contrast, if you’re in a 22% tax bracket today but expect to be in a higher one in the future, it can make sense to do a Roth 401(k).

Of course, no one knows for sure where tax rates will be in the future, but it’s never a bad idea to assume taxes will be higher, not lower, down the road. That's especially true since federal individual tax rates are low by historical standards.

Tip: To pinpoint what tax bracket you’re in now, review your latest tax return to determine your current taxable income and see where you fall by comparing it to the IRS tax brackets for 2025 or 2026.

How do RMDs differ?

There’s another advantage of a Roth 401(k). Thanks to the SECURE 2.0 Act, you no longer must take required minimum distributions (RMDs) from Roth 401(k)s during your lifetime. Savers in traditional 401(k)s, however, are subject to RMDs. Required minimum distributions are minimum amounts that IRA and retirement plan account owners must withdraw annually starting with the year they reach age 72 (73 if you reach age 72 after Dec. 31, 2022).

“It gives (the Roth 401(k) account holder) a lot more flexibility because you’re not forced to take withdrawals,” said Williams.

Not having to withdraw money from a Roth 401(k) has multiple benefits. One is being able to keep all your money invested for longer to boost your account’s growth potential. (Traditional 401(k) users, in contrast, are forced to withdraw money even if they don’t need to, which boosts their taxable income and reduces their account balance.)

Roth 401(k)s offer tax diversification.

Having some of your retirement savings in a Roth 401(k) also allows you to benefit from “tax diversification.” If you have multiple sources of income in retirement, from say a traditional 401(k), taxable brokerage accounts, cash savings, and a Roth 401(k), you have more flexibility in deciding which account to withdraw from to minimize your tax burden. Say you need $50,000 for a down payment on a vacation home or a new car. Yanking the entire amount out of a traditional 401(k) will create $50,000 more in taxable income that could push you up to a higher tax bracket.

However, if you have ample savings in a Roth 401(k), you could take your RMDs and then pull the rest of the money you need from the Roth 401(k) to make your large purchase more tax-efficient, said Williams.

“We call it tax bracket harvesting,” said Williams, referring to the strategy of pulling from more tax-efficient accounts to avoid generating additional income that could boost your tax bill. “What you’re doing is diversifying tax risk and providing yourself more flexibility when you get to retirement.”

You can contribute to both a Roth and a traditional 401(k).

Since future tax rates are tough to predict, there’s nothing to say you can’t hedge your bets by contributing to both a traditional and Roth 401(k), adds Williams. If you go this route, you must still adhere to the IRS-imposed maximum contribution limits. You can’t, for example, sock away $23,500 in a traditional 401(k) and another $23,500 in a Roth 401(k).

In some cases, deciding between a traditional 401 (k) and a Roth 401(k) can come down to a simple personal finance concept called cash flow, adds Gandhi. If your monthly budget is tight, the traditional 401(k) might be a better fit, as the upfront tax deduction you get from making pre-tax contributions means you’ll have more left in your paycheck after funding your account than if you took the same amount out after-tax to invest in a Roth 401(k).

Tip. Do you know how your 401(k) balance compares to others your age? There are some basic rules to follow if you want to be a 401(k) millionaire by retirement.

Roth 401(k) vs 401(k) or both?

Choosing between a Roth and a Traditional 401(k) is a personal decision. But remember that you can split the difference and contribute to both a Roth 401(k) and a Traditional 401(k) account — and you can switch back and forth during the year or throughout your career, assuming your plan allows it. By using both plans, you can diversify your tax situation in retirement — and that's always a good thing.

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