Your employer offers a 401(k). You're contributing. Good. But there's a second question most people skip past on the enrollment form: Roth or Traditional?
The difference comes down to when you pay taxes. Traditional 401(k) contributions are pre-tax. They reduce your taxable income now, and you pay income tax when you withdraw in retirement. Roth 401(k) contributions are after-tax. Your paycheck is smaller today, but withdrawals in retirement are completely tax-free.
Same contribution. Two very different paycheck impacts.
The Paycheck Difference
Let's say you earn $60,000 and contribute 6% ($3,600/year) to your 401(k). Here's what happens to your paycheck under each option:
| Traditional 401(k) | Roth 401(k) | |
|---|---|---|
| Annual contribution | $3,600 | $3,600 |
| Taxable income | $56,400 | $60,000 |
| Estimated federal tax | $5,688 | $6,480 |
| Per-paycheck difference | — | ~$30 less per paycheck |
With a Traditional contribution, you keep about $30 more per paycheck right now because the contribution reduces your taxable income before withholding is calculated. With Roth, you pay full taxes on your salary and the contribution comes out of what's left.
That $30 per paycheck doesn't sound like much. But over 30 years, the question is whether you'd rather have the tax break now or in retirement.
When Traditional Wins
You're in your peak earning years. If you're in the 24% or 32% bracket now and expect to be in a lower bracket in retirement (most people spend less in retirement than during their working years), Traditional saves you money on a lifetime basis. You avoid taxes at a high rate now and pay them at a lower rate later.
You need the bigger paycheck today. If cash flow is tight, the Traditional option puts more money in your pocket each pay period. That might be the difference between contributing at all and not contributing.
When Roth Wins
You're early in your career. If you're in the 12% or 22% bracket, paying taxes now is cheap. Your Roth contributions will grow for decades and every dollar of growth comes out tax-free. The math overwhelmingly favors Roth for younger workers in lower brackets.
You believe tax rates will be higher in the future. While the 2017 tax brackets were made permanent in 2025, future Congresses could still raise rates to address deficits or shifting priorities, locking in today's rates with Roth contributions is a hedge against that risk.
You want flexibility in retirement. Having both Traditional and Roth balances in retirement gives you the ability to manage your tax bracket strategically. Draw from Traditional up to a bracket threshold, then switch to Roth to stay under it.
The Split Strategy
If you're unsure, split your contributions. Many plans allow you to direct a percentage to Traditional and a percentage to Roth. A 50/50 split hedges your bet on future tax rates and gives you both tax-free and taxable buckets to draw from later.
Use our 401(k) Calculator to see exactly how Traditional vs Roth contributions affect your current take-home pay. The difference is often smaller than you'd expect. Understanding it makes the decision a lot easier.
One thing both options agree on: contributing something is always better than contributing nothing. The employer match alone (typically 50% to 100% of your contribution up to a percentage of salary) is the best guaranteed return in personal finance. Get the match first. Then decide how to split the rest.