Roth 401(k) vs Traditional 401(k)

I've spent years helping clients navigate the Roth 401(k) vs Traditional 401(k) decision, and I can tell you it's one of the most impactful choices you'll make for your retirement. The difference between these two accounts comes down to when you pay taxes—now or later.

The Traditional 401(k) has been around since 1978, and it works the way most people expect: you get an immediate tax deduction on your contributions. Put in $23,500 during 2026 while you're in the 24% tax bracket, and you'll save $5,640 on this year's taxes. That's real money back in your pocket right now. Your investments then grow tax-deferred, meaning you don't pay taxes each year on dividends or capital gains. The tradeoff? Every dollar you withdraw in retirement gets taxed as ordinary income. This setup works beautifully for high earners who expect to drop into lower tax brackets after they stop working.

The Roth 401(k) appeared much later, in 2006, and it reverses everything. You contribute after-tax dollars—no deduction today. But here's where it gets interesting: all your withdrawals in retirement are completely tax-free. Every penny of growth, every dollar of earnings—tax-free. Let me give you an example. A 30-year-old who contributes $23,500 annually and earns 7% returns could see that account grow to over $2.4 million by age 65. With a Roth, that entire balance comes out tax-free. If you're young or in a lower tax bracket now, that's incredibly powerful.

The Required Minimum Distribution rules create another major difference. Traditional 401(k)s force you to start taking withdrawals at age 73, whether you need the money or not. These forced distributions create taxable income that can push you into higher brackets and even increase your Medicare premiums. The SECURE 2.0 Act changed the game for Roth 401(k)s by eliminating RMDs entirely for account owners. This gives you much more control over your money and opens up better estate planning options.

Both accounts have the same contribution limits: $23,500 in 2026, with an additional $7,500 catch-up if you're 50 or older. But there's a subtle advantage to the Roth that many people miss. Since you're contributing after-tax dollars, that $23,500 represents more actual retirement purchasing power than the same amount in a Traditional account. You've already paid the tax bill.

I typically recommend splitting your contributions between both account types. This gives you tax diversification and flexibility down the road. You can control your taxable income in retirement by choosing which account to draw from each year.

If you're in a lower tax bracket now—say 12% or 22%—the Roth usually makes more sense. You're locking in a low tax rate. If you're in the 32% or 37% bracket, the immediate tax savings from a Traditional contribution can be too good to pass up.

The right choice depends on where you are now versus where you expect to be in retirement. Think about your career trajectory, how many years until retirement, and honestly assess whether you think tax rates will be higher or lower when you retire. Your future self will thank you for getting this decision right.