Should I use a traditional or a Roth 401(k)?
It comes down to one comparison — your marginal tax rate now against your expected rate in retirement — and for the same cost to today's take-home pay the two differ only by the ratio between them.
Strip away the folklore and the algebra is short. For an equal after-tax cost today, a traditional account and a RothAn account funded with money you have already paid tax on, where qualified withdrawals are then untaxed. The mirror image of a traditional account: you pay today's rate instead of the rate you will face in retirement.Read the evidence on this → account produce the same result multiplied by (1 - retirement rate) / (1 - current rate). If your rate falls in retirement, traditional wins. If it rises, Roth wins. Growth rate and Time horizonHow long until the money is needed. It governs how much volatility is tolerable, and it is the assumption most often left unstated in a rule of thumb quoted without one. do not tip it; they scale both sides equally.
That makes the question empirical rather than philosophical. High earners in their peak years usually face a lower rate later. People early in a career, or in a year with unusually low income, often face a higher one. Neither group needs a rule of thumb — they need their own two numbers.
There is a second, smaller argument for splitting: nobody knows future tax law, and holding both gives you something to draw from in a year when one rate is unexpectedly bad. That is a hedge, not an optimisation, and it should be described as one.
When the answer is different
- Roth contribution limits are stated after tax, so at the statutory maximum a Roth shelters more real money than a traditional account does — the comparison above assumes equal after-tax cost, not equal contributions.
- Means-tested benefits, Medicare premium brackets and Social Security taxation all key off taxable income in retirement, which can push the effective retirement rate well above the headline bracket.
Put your own numbers to it
Every answer here is general. These are not.
- 401(k) optimizer
Am I leaving employer money on the table?
The research this rests on
Each note states its claim, rates how strong the evidence actually is, and lists the conditions under which it fails.
- Traditional versus Roth is one comparison of two tax rates
For the same cost to today's take-home pay, a traditional and a Roth account differ only by the ratio (1 - retirement rate) / (1 - current rate); growth rate, horizon and contribution size cancel exactly. (strong)
- Tax drag is a fee you can often remove entirely
Holding the same investment inside a tax-advantaged account rather than a taxable one raises net returns with no additional risk taken. (strong)
- Which account holds which asset changes your return without changing your risk
For an unchanged overall allocation, placing tax-inefficient assets inside tax-advantaged accounts raises after-tax returns, and household portfolios show most people do not arrange their accounts this way. (moderate)
Terms used on this page
The same definitions the underlined words open, written out so nothing on this page depends on a click.
- Roth
- An account funded with money you have already paid tax on, where qualified withdrawals are then untaxed. The mirror image of a traditional account: you pay today's rate instead of the rate you will face in retirement. Evidence →
- Time horizon
- How long until the money is needed. It governs how much volatility is tolerable, and it is the assumption most often left unstated in a rule of thumb quoted without one.