When it comes to saving for retirement, one of the biggest decisions you’ll make is whether to contribute to a traditional (also known as “tax-deferred”) 401(k) or a Roth 401(k). Both options offer valuable tax advantages, but they work in very different ways. Choosing the right option depends on your current financial situation, what you expect your income to be in the future, and your long-term financial goals.
One of the key differences between the 2 options is how and when you pay taxes. A traditional 401(k) allows you to contribute on a pre-tax basis, which reduces your taxable income today. This means you get an immediate tax break, but you’ll pay taxes when you withdraw the funds in retirement. In contrast, a Roth 401(k) is funded with after-tax dollars, so there’s no tax deduction upfront. However, qualified withdrawals in retirement are entirely tax-free. Additionally, although both types of 401(k) accounts allow your investments to grow, growth is tax-deferred in a traditional 401(k) and tax-free in a Roth 401(k).
Despite their taxation differences, there are some similarities between both types of 401(k) accounts. One of the main similarities is that both types of accounts have the same annual contribution limit (which is $23,500 in 2025, with an additional $7,500 allowed for those aged 50 and older). Many employer plans also offer employer matching contributions, and both types impose a 10% early withdrawal penalty if you take money out before age 59½, except in certain qualifying situations.
So how do you decide which type of 401(k) to contribute to? A Roth 401(k) is often a smart choice if you’re early in your career and expect to be in a higher tax bracket later in life. Paying taxes now, when your rate is relatively low, can result in major savings down the road when you begin taking tax-free withdrawals. It also offers the advantage of more years for your investments to grow tax-free. Even if your income doesn’t rise, many experts believe federal tax rates in general are likely to go up in the future, making Roth contributions a good hedge against rising taxes.
If you already have a traditional 401(k), adding Roth contributions can help diversify your tax exposure. Having both types of accounts provides greater flexibility in retirement, giving you more control over how and when to withdraw funds without pushing yourself into a higher tax bracket. Additionally, this strategy can also help you manage the taxation of Social Security benefits and Medicare surcharges.
Another major perk of the Roth 401(k) is that it no longer requires minimum distributions during retirement. This change, enacted by the SECURE Act 2.0, means you can leave your money invested longer and enjoy even more years of tax-free growth.
On the other hand, a traditional 401(k) may be the better fit if you’re currently in a high tax bracket and want to reduce your taxable income now. The immediate tax savings can be significant, especially if you expect to be in a lower bracket once you retire. However, this approach is most effective if you’re disciplined enough to invest the tax savings, rather than spend it.
Some employers only offer matching contributions to traditional 401(k) plans, or place restrictions on Roth contributions. In such cases, it might make sense to contribute to a traditional plan just to capture the full match, then switch to Roth contributions later in the year.
Luckily, you don’t have to pick just one of the 401(k) account types. Many people choose to contribute to both types, either within the same year or by alternating annually. This hybrid approach allows you to take advantage of the strengths of each plan while staying within the IRS contribution limits. For 2025, you can contribute a combined $23,500 (or $31,000 if you’re over 50), not including any employer match, which can push your total annual savings as high as $70,000 or more.
In the end, the decision regarding whether you should contribute to a traditional 401(k) or a Roth 401(k) comes down to your unique financial circumstances. While Roth is popular among many investors for its long-term tax benefits, it’s not a “one-size-fits-all” solution. If you’re unsure which option is right for you, consult your financial advisor to help you determine the best strategy based on your income, age, and retirement goals. Choosing the right strategy today can have a big impact on your financial future.