Roth vs Traditional 401(k): Which Is Better for You?

The real question: where will your tax rate be?

The Roth vs Traditional decision comes down to one thing — whether your tax rate is higher now or in retirement. Pay taxes now (Roth) if you expect them to rise. Defer taxes (Traditional) if you expect them to fall.

Most people assume their income drops in retirement, making Traditional seem obvious. But that ignores several factors that push retirement taxes higher than expected.

Why Roth is winning the debate

Several trends favour the Roth:

• Tax rates are historically low. The 2025 tax law made today’s brackets permanent, but Congress can always raise rates later. Paying today’s known rates may beat tomorrow’s unknown ones.
• Social Security taxation. Traditional 401(k) withdrawals count as income, which can push up to 85% of your Social Security benefits into taxable territory.
• No RMDs. Traditional 401(k)s force withdrawals starting at 73, whether you need the money or not. Roth accounts let your money grow tax-free indefinitely.
• Estate planning. Roth accounts pass to heirs tax-free. Traditional accounts burden heirs with income tax on every dollar withdrawn.

When Traditional still wins

The Traditional 401(k) is better when:

• You’re in the 32% bracket or higher and confident you’ll be in a lower bracket in retirement
• You need the tax deduction now to qualify for other benefits (child tax credit, education credits)
• You’re close to retirement with little time for Roth growth to compound
• Your employer match goes into Traditional regardless — so having both provides tax diversification

A $24,500 Traditional contribution saves someone in the 24% bracket $5,880 in taxes this year. That’s real money you can invest elsewhere.

The math on a $24,500 contribution

Assume 7% annual growth over 25 years, 24% tax bracket now, 22% in retirement:

Roth path: $24,500 after-tax → grows to $132,972 → withdraw $132,972 tax-free

Traditional path: $24,500 pre-tax → grows to $132,972 → withdraw $132,972 minus 22% tax = $103,718 after tax

But the Traditional saver got a $5,880 tax refund upfront. Invested at 7% for 25 years, that becomes $31,913.

Traditional total: $103,718 + $31,913 = $135,631. Slightly more than Roth — but only because the retirement tax rate was lower.

If retirement and current rates are the same (24%), the Roth wins because there’s no tax drag on the full balance.

Marginal rate in, effective rate out

There’s a structural asymmetry the simple bracket comparison hides. Traditional contributions save tax at your top marginal rate — for a single filer earning $85,000 in 2026, every dollar contributed avoids the 22% bracket. But withdrawals in retirement fill the brackets from the bottom up.

The first $16,100 of annual withdrawals is wiped out by the standard deduction — tax-free. The next $12,400 of taxable income is taxed at only 10%, then everything up to $50,400 at 12%. A retiree drawing $60,000 a year from a Traditional 401(k) pays about $5,020 in federal tax — an effective rate of 8.4%.

Save at 22% going in, pay 8.4% coming out. That spread is the quiet argument for Traditional contributions, and it holds even when retirement income looks respectable. The Roth case rests on whatever erodes it: Social Security, pensions, and RMDs filling those low brackets first — or tax rates rising before you retire.

The best answer: do both

If your employer offers both, split contributions. Tax diversification in retirement is valuable — you can draw from Traditional accounts up to a low bracket, then switch to Roth for the rest. This gives you control over your tax bill in retirement.