Both traditional and Roth 401(k) accounts let you save for retirement through your employer. The key difference is when you pay income tax.
The difference in one line
- Traditional 401(k): contributions come out before income tax, so your paycheck shrinks by less than the amount you save. You pay tax when you withdraw the money in retirement.
- Roth 401(k): contributions come out after income tax, so your paycheck shrinks by the full amount. Qualified withdrawals in retirement are tax free.
What happens to your paycheck
For a single filer earning $80,000 in a state with no income tax, a 10% contribution is $8,000 a year:
| No 401(k) | Traditional 10% | Roth 10% | |
|---|---|---|---|
| Federal income tax | $8,770 | $7,010 | $8,770 |
| Take-home pay per year | $65,110 | $58,870 | $57,110 |
| Reduction in take-home | — | $6,240 | $8,000 |
The traditional contribution costs about $6,240 of take-home pay and the Roth costs $8,000, but the Roth money will not be taxed later. Employer matching contributions usually go into a pre-tax account, even if you choose Roth for your own money.
Which is better?
- A Roth tends to suit people who expect a higher tax rate in retirement, such as early in a career.
- A traditional account tends to suit people in a high bracket now who expect to be in a lower one in retirement.
- Many people split contributions between both to diversify future taxes.
Annual contribution limits are set by the IRS and change most years, so check the current figure before you plan. Not every employer offers a Roth option.
See how a traditional contribution changes your pay in 401(k) and take-home pay. This is general information, not tax or investment advice.
Try the take-home pay calculator to see your own numbers, or pick your state from the state list.