Most employer retirement plans offer two flavors of 401(k): traditional (pre-tax) and Roth. They differ in exactly one thing — when you pay tax on the money. That single difference cascades into different paychecks today and different withdrawals decades from now. Here's how to think about it.
The Core Difference
| Traditional (Pre-Tax) | Roth | |
|---|---|---|
| Contributions | Reduce current taxable income | Made with after-tax dollars |
| Growth | Tax-deferred | Tax-free |
| Withdrawals in retirement | Taxed as ordinary income | Completely tax-free |
| Required Minimum Distributions | Yes, starting age 73 | None (in Roth IRA); for Roth 401(k), starting 2024 the RMD is also eliminated |
| FICA impact | Still pay Social Security and Medicare on contributions | Same — still pay FICA |
How It Feels in Your Paycheck
A traditional 401(k) contribution lowers your federal and state income tax withholding today. If you're in the 22% federal bracket and contribute $500 from your paycheck, your take-home only drops by about $390 — the tax savings cover the rest.
A Roth 401(k) contribution doesn't reduce withholding. If you contribute $500, your take-home drops by the full $500. The trade-off: all of it grows tax-free, and you never pay tax on it again.
When Traditional Wins
- You're in a high tax bracket now and expect to be in a lower one in retirement (common for late-career professionals).
- You want maximum take-home pay today — cash flow matters.
- You expect to retire in a no-income-tax state after working in a high-tax state.
- You're at a stage where reducing AGI helps you qualify for other tax benefits.
When Roth Wins
- You're young and your income (and tax rate) will likely grow significantly.
- You expect tax rates in general to be higher decades from now (a reasonable bet given long-term fiscal pressure).
- You want to leave heirs a tax-free inheritance.
- You're in a low bracket right now — student years, early career, a sabbatical year — paying tax now is cheap.
- You want flexibility on withdrawals without worrying about RMDs.
The Hidden Argument for Roth
One subtle advantage: Roth contributions effectively let you save more money in real terms. The contribution limit ($23,500 in 2025, $31,000 if you're 50+) is the same dollar amount whether you go traditional or Roth. But $23,500 of after-tax money is worth more in retirement than $23,500 of pre-tax money. So Roth users can effectively shelter more wealth, even though the contribution limit looks the same.
The Split Strategy
You don't have to pick one. Many plans let you split contributions between traditional and Roth. A common approach:
- Contribute enough to traditional to drop yourself into a lower bracket if you're hovering near a threshold.
- Put the rest in Roth for tax diversification.
Having both pre-tax and after-tax retirement money gives you flexibility to manage your tax bill in retirement — pull from Roth in high-income years, traditional in low-income years.
What About the Employer Match?
Whichever you choose for your own contributions, your employer's match has historically gone into the traditional bucket — even if you're contributing Roth. Starting in 2024, the SECURE 2.0 Act allows employers to offer Roth matching, but it's optional and not all plans support it yet. Check with your benefits team.