I look at a lot of 401(k) statements every year. Most people are contributing to the Traditional 401(k). It’s what the messaging has always pushed: save pre-tax, lower your taxable income now, and pay less in retirement when your income drops. Simple, right? Well, not really.
The real question is whether that old advice still makes sense. What if it doesn’t? What if choosing a Roth 401(k) actually leaves you with close to a million dollars more by the end of your life? Let’s walk through it together.
Table of Contents
Traditional 401(k) vs Roth 401(k): The Basics
Before we crunch numbers, let’s make sure the foundation is clear.
Traditional 401(k):
- You put money in before taxes.
- Your taxable income goes down now.
- Withdrawals in retirement are taxed as ordinary income.
Roth 401(k):
- You contribute money that’s already been taxed.
- No tax break upfront.
- Withdrawals in retirement are tax-free.
On the surface, the choice looks like “pay taxes now” vs “pay taxes later.” But the decision is far more complicated than that, especially once you factor in decades of growth, required minimum distributions (RMDs), and even how your heirs will be taxed.
The Case Study: Assumptions We Used
To really compare these accounts, let’s build a real-world example. Here’s the situation:
- A 45-year-old contributes $22,500 per year until age 67.
- They live to age 92.
- Investments are 80% stock, 20% bonds.
- Expected returns: 6.24% per year (lower than historical averages).
- Flat 25% tax rate while working, in retirement, and for heirs.
- No company match, no catch-up contributions, no withdrawals during accumulation.
This example is simplified. Real life has pensions, Social Security, different tax brackets, and spending needs. But keeping it clean helps us see the real differences between a Traditional 401(k) vs Roth 401(k).
The Numbers: Traditional 401(k)
Here’s how it plays out with the Traditional account:
- Total contributions: $472,500 over 21 years.
- Tax savings while working: $118,125.
- Balance at retirement (age 67): $1,134,000.
- Balance at age 92: $4,277,000.
- After factoring in RMDs, reinvestment, and taxes for heirs, the net after-tax value is $3,967,000.
That sounds like a lot of money — and it is. But let’s compare it to the Roth.
The Numbers: Roth 401(k)
Now, let’s look at the Roth 401(k).
- Same contributions: $472,500.
- Taxes paid upfront: $234,000.
- Balance at retirement (age 67): $1,134,000.
- Balance at age 92: $5,152,000.
- No taxes owed on withdrawals, ever.
Final result? A net after-tax value of $4,917,000. That’s about a million dollars more than the Traditional 401(k).
The Bottom Line
In this modeled example, the Roth option wins by a long shot. Why? Because the growth happens tax-free. Every dollar that account earns belongs to you, not the IRS.
But here’s the thing — this analysis assumes the same 25% tax rate across your lifetime. Real life isn’t that neat. Which leads us to the bigger insights.
Key Insights for Retirement Savers
So what should you take away from this? Here are the key lessons:
- Your tax bracket may not fall in retirement.
Many people assume they’ll be in a lower bracket. But with Social Security, RMDs, and possibly part-time work, your taxable income may stay high. - Taxes are a moving target.
Tax laws change. Rates may rise. Building tax-free money in a Roth is like buying insurance against future tax hikes. - Heirs prefer Roth accounts.
Under current law, heirs must empty inherited IRAs within ten years. If those accounts are Roths, they don’t pay a dime in taxes. - Flexibility matters.
With Roth money, you can control taxable income in retirement. That can help you avoid Medicare surcharges and minimize taxes on Social Security.
The “Yes, But” Factors
Of course, nothing in personal finance is one-size-fits-all. There are important wrinkles:
- Company match: Employer contributions usually go into the Traditional side.
- Catch-up contributions: For those over 50, extra contributions may shift the math.
- Withdrawal needs: If you expect to spend heavily early in retirement, taxes could weigh differently.
- Changing tax laws: Future reforms could impact Roth or Traditional advantages.
That’s why many financial planners encourage “tax diversification.” Having some money in both Roth and Traditional accounts gives you flexibility to manage taxes year by year.
Practical Steps You Can Take Today
Thinking this through doesn’t have to be overwhelming. Here are some steps you can take right now: review your 401(k) elections and check if Roth contributions are available, and if you’re already contributing to a Traditional 401(k), consider switching new contributions to Roth. Ask your HR or plan administrator about employer match details so you understand how those contributions are treated. It’s also wise to work with a planner to run projections using your real numbers, and if you have a large pre-tax balance, explore whether Roth conversions make sense for you.
Two Lists to Keep in Mind
When I sit with clients, I often share two simple lists to help them weigh their choice.
Reasons to Favor
|
Reasons to Favor
|
|---|---|
| You need the tax deduction now. | You expect taxes to rise. |
| You expect your retirement income to be very low. | You want tax-free income in retirement. |
| Your employer only offers Traditional contributions. | You want to leave tax-free assets to your heirs. |
| You don’t want to worry about RMDs later in life. |
Why Having Both Can Be the Best Strategy
It’s easy to think the choice is either-or, but many people benefit from using both Traditional and Roth 401(k) accounts. Annual contribution limits apply to your total 401(k) contributions, but you can split them between the two types. That means if the limit is $22,500, you could put part in Roth and part in Traditional depending on what makes sense each year.
Tax diversification is a key concept here. Many financial institutions and advisors define it as holding a mix of taxable, tax-deferred (Traditional), and tax-free (Roth) accounts. It’s become a core part of modern retirement planning because no one knows exactly how taxes will change over the decades ahead.
Why does this matter? Having money in different tax buckets gives you flexibility later. In retirement, you can strategically choose which accounts to withdraw from each year to manage your taxable income. For example, in years when you want to stay under Medicare premium thresholds or reduce the taxation of Social Security benefits, you can lean on Roth withdrawals. In years when you need extra deductions or expect lower overall income, you can draw more from Traditional.
This balance also acts as a hedge against future tax rate changes. If rates climb, Roth withdrawals protect you. If rates fall, Traditional withdrawals may be more attractive. Think of it as insurance: just as you diversify your investments, you can diversify your tax exposure. Flexibility in retirement is the real prize, and having both accounts helps you control your income, taxes, and benefits in ways that a single account type simply cannot.
Final Thoughts: The Million-Dollar Decision
When you put it all together, the decision between a Traditional 401(k) vs Roth 401(k) is not small. Under the assumptions we walked through, choosing Roth over Traditional could add about $1,000,000 to your after-tax wealth.
But your life isn’t a case study. Your tax rate, your retirement lifestyle, and your estate planning goals are unique. That’s why the “right” choice for you depends on more than just math.
I tell clients: give yourself options in retirement, and that includes taxable income options. The Roth is a powerful tool, and tax-free growth is a game changer. But if contributing the maximum to a Traditional 401(k) this year drops you into a lower tax bracket, it might be worth it. The best path is usually some of both. That way you build tax diversification and give yourself the flexibility to manage your taxable income as laws, brackets, and your lifestyle change. Your investment strategy should be fitted specifically for your life, both now and in retirement.
