How to Choose Between a Traditional and Roth 401k

Learn the mechanical differences between Traditional and Roth 401k accounts to decide which best fits your tax strategy today versus retirement.

1. Understand the tax timing. A Traditional 401k uses pre-tax dollars, meaning your taxable income is lower today, but you pay ordinary income tax when you withdraw money in retirement. A Roth 401k uses after-tax dollars, meaning you pay taxes on the money now, but your withdrawals—including all growth—are tax-free in retirement.
2. Compare your current bracket to your future one. If you are in a high tax bracket today and expect your income—and therefore your tax bracket—to be lower in retirement, a Traditional 401k likely saves you more money. If you are in a lower tax bracket today or expect your income to rise significantly, paying taxes now via a Roth 401k may result in a lower total tax bill over your lifetime.
3. Factor in tax diversification. Many savers use both account types to hedge against tax uncertainty. By keeping some money in a tax-deferred account and some in a tax-free account, you gain flexibility to manage your taxable income during retirement to stay within lower tax brackets.
4. Evaluate the employer match. Regardless of whether you choose Traditional or Roth, your employer's matching contributions are almost always deposited as pre-tax dollars. This means that even if you contribute 100% to a Roth 401k, you will eventually owe taxes on the portion of your balance derived from your employer's match.