Should 401(k) Contributions Be Pre or Post Tax? – Avoid This Mistake + FAQs

Before comparing options, let’s clarify the basics. Pre-tax 401(k) contributions (to a Traditional 401(k)) are taken out of your paycheck before income taxes are applied.

This means they reduce your taxable income today, giving you an immediate tax break. In exchange, both your contributions and their investment earnings will be taxed as ordinary income when you withdraw the money in retirement.

On the other hand, post-tax 401(k) contributions go into a Roth 401(k) (named after the Roth provisions in tax law). These contributions are taken from your pay after taxes have been withheld.

You don’t get a tax deduction upfront for Roth 401(k) contributions. However, the big benefit comes later: qualified withdrawals in retirement from a Roth 401(k) are completely tax-free, including all the investment growth, as long as certain conditions are met.

In short, with Roth contributions you pay taxes now, but potentially never pay taxes on that money (or its growth) again.

It’s essentially a question of “taxes now vs taxes later.” Pre-tax (Traditional) 401(k) = no taxes now, taxes later. Post-tax (Roth) 401(k) = taxes now, no taxes later.

Which is better depends on your situation and whether you think your current tax rate is higher or lower than it will be in retirement. Of course, there are other factors to consider, which we’ll explore in detail.

Federal Tax Law: How 401(k) Contributions Are Treated

Federal law sets the groundwork for how all 401(k) contributions are taxed, whether pre-tax or Roth. The rules are defined by the Internal Revenue Code and overseen by the IRS. Here’s what the federal tax landscape looks like for 401(k) contributions:

• Immediate Tax Impact: If you contribute to a Traditional 401(k) (pre-tax), your taxable income is reduced by the amount of your contribution. For example, if you earn $80,000 and put $10,000 pre-tax into your 401(k), you’ll only be taxed on $70,000 of income federally for that year. In contrast, a Roth 401(k) contribution does not reduce your current taxable income – using the same example, you’d be taxed on the full $80,000. The reward for paying taxes now on the Roth contribution is that later, your withdrawals can be tax-free.

• IRS Contribution Limits: Federal law caps how much you can contribute to your 401(k) each year. As of 2024, the employee contribution limit is $23,000 per year (or $30,500 if you’re age 50 or older, thanks to a $7,500 catch-up allowance). This limit is combined for Traditional and Roth contributions – you can split between pre-tax and Roth, but the total must not exceed the annual cap. For example, you could do $11,500 pre-tax and $11,500 Roth in 2024, and that would max out the limit. These limits adjust annually for inflation.

• Total Contribution Limit: In addition to what you contribute, your employer might add a matching contribution or other employer contributions. For 2024, the total combined contribution limit (employee + employer) is $69,000 (or $76,500 with catch-up if you’re 50+). Employer contributions do not count against your personal $23,000 limit, but they do count toward this overall cap. Note that employer contributions are always pre-tax from the IRS perspective – even if you contribute Roth, any company match is contributed to the traditional (pre-tax) side of your 401(k). (Recent legislation in 2022 now allows employers to offer a Roth match option, but it’s still uncommon. If offered, you could elect to have the match go into your Roth 401(k) – but you’d have to pay taxes on that match amount now, since by default matches are tax-deferred.)

• Tax-Deferred Growth: Regardless of Traditional or Roth, all investments inside your 401(k) grow tax-deferred while in the account. You won’t pay taxes each year on dividends, interest, or capital gains earned by your 401(k) investments. The difference comes at withdrawal: Traditional growth will be taxed as income, Roth growth can be tax-free if conditions are met.

• Withdrawal Rules (Federal): Generally, 401(k) money is meant for retirement, so withdrawals before age 59½ are discouraged and may incur a 10% early withdrawal penalty on top of regular income tax. This applies to both Traditional and Roth 401(k)s for any taxable portion of the withdrawal. For a Traditional 401(k), any withdrawal is taxable income (since none of it was taxed going in). For a Roth 401(k), any qualified withdrawal is completely tax-free (qualified means the account is at least 5 years old and you are 59½ or older, or you meet another qualifying event like disability). If you withdraw from a Roth 401(k) early and it’s not qualified, the earnings portion of the withdrawal would be subject to taxes and penalty, while the contributed portion is returned tax-free. However, unlike a Roth IRA, non-qualified withdrawals from a Roth 401(k) are prorated between contributions and earnings – you can’t just pull out only contributions first. This means early Roth 401(k) withdrawals can indeed trigger some tax/penalty on the earnings portion.

• Required Minimum Distributions (RMDs): A key federal rule is that Traditional 401(k)s are subject to required minimum distributions. At a certain age, you must start taking minimum withdrawals from a Traditional 401(k) each year, so the government can finally tax that money. Recent changes in law (the SECURE Act 2.0 of 2022) increased the RMD beginning age to 73 (for those reaching age 72 after 2022) and it will eventually rise to 75 for people born in 1960 or later. Roth 401(k)s also historically required RMDs at the same age, which was a downside compared to Roth IRAs. However, starting in 2024, Roth 401(k)s no longer have RMDs during the original owner’s lifetime thanks to SECURE 2.0. (Even before this change, many people would roll their Roth 401(k) into a Roth IRA upon leaving the job to avoid RMDs. Now the law has aligned Roth 401(k)s with Roth IRAs by eliminating RMDs for Roth accounts.)

• Taxation on Withdrawals (Federal): In retirement, Traditional 401(k) withdrawals are taxed as ordinary income at whatever your tax bracket is in the year of withdrawal. It doesn’t matter if the money came from long-term capital gains or dividends; once pulled from a 401(k), it’s all treated as income. Roth 401(k) qualified withdrawals, by contrast, are tax-free – you owe no federal income tax on those distributions because you paid taxes up front. This difference is at the heart of the pre-tax vs post-tax decision.

Federal law essentially gives you two choices for how your 401(k) is taxed: defer taxes now (Traditional) or pay now and defer taxes later (Roth). Both are legal and beneficial, but in different ways. Next, we’ll discuss how state taxes come into play – something many people overlook.

State Tax Nuances: Will Your State Tax Your 401(k) Differently?

Federal tax rules get most of the attention, but state income taxes can also impact your 401(k) strategy. Every state has its own tax laws, and not all follow the federal treatment of retirement contributions and withdrawals. Here are some key state-level nuances to consider:

• Most States Follow Federal Lead: In the majority of states with an income tax, 401(k) contributions are treated the same for state taxes as they are for federal taxes. That means if you contribute to a Traditional 401(k), your contributions are not counted as state taxable income (you get a state tax deduction automatically, since they start from federal adjusted gross income). Similarly, Roth 401(k) contributions provide no state tax deduction up front, but qualified withdrawals will be state tax-free.

• States with No Income Tax: If you live in a state with no income tax (like Florida, Texas, Nevada, etc.), 401(k) contributions won’t give you any state tax benefit because you weren’t paying state tax to begin with. In those cases, the decision is purely about federal tax (unless you later move to a state with income tax in retirement). On the flip side, if you currently live in a high-tax state and plan to retire in a no-tax state, Traditional 401(k) contributions give you a double benefit: you avoid high state tax now and won’t face state tax on withdrawals later because your retirement state doesn’t tax income.

• States That Tax 401(k) Contributions Now (and Don’t Tax Later): A few states are “contrarians” and do not fully follow the federal rules on retirement contributions. Pennsylvania is a notable example: Pennsylvania does not allow a tax deduction for 401(k) or 403(b) contributions. This means if you work in PA, your 401(k) contributions are still counted in your Pennsylvania taxable income (you pay PA state tax on that income even though it went into a 401k). The silver lining is that Pennsylvania exempts retirement distributions after age 59½. In essence, PA taxes your 401(k) like a Roth at the state level – tax now, none later. If you’re a Pennsylvania resident, this nuance means a Traditional 401(k) won’t save you state tax today (only federal), but you also won’t owe PA tax on withdrawals in retirement. Roth vs Traditional in PA ends up the same for state tax (taxed upfront), so your decision in PA leans more on federal impact.

  New Jersey historically also taxed certain retirement contributions, but it does allow pretax treatment for 401(k) contributions (since 1984). NJ still taxes traditional IRA contributions (no state deduction), but for 401(k)s you get the deduction now and then withdrawals are taxed to the extent they were not previously taxed. Massachusetts doesn’t allow deductions for traditional IRA contributions (so it taxes them now and not later), but follows federal rules for 401(k)s. Always check your specific state’s rules. The key is: if you pay state tax on contributions now, ensure you don’t pay again on those amounts when withdrawing (you’ll need to track your basis for state purposes).

• States That Don’t Tax Retirement Income: Some states exempt some or all retirement income (pensions, 401(k) distributions, etc.) for retirees. For example, Illinois does not tax distributions from 401(k)s, IRAs, and pensions. If you’re planning to retire in such a state, that could influence your strategy. For instance, an Illinois resident might benefit more from Traditional contributions now: you get the tax break upfront (including federal and any state tax you do pay while working, if applicable) and then pay no state tax on the withdrawals. Roth vs Traditional in that scenario only matters for federal tax, since state tax will be zero in retirement either way. On the other hand, if you’re currently in a state with no income tax but might retire in a state with income tax, doing some Roth contributions now could shield you from future state taxes on distributions.

• Local City Taxes: A nuance for a few locales: some cities or local jurisdictions have income taxes (e.g., New York City, Philadelphia). They may or may not follow the same rules for retirement contributions. For example, Philadelphia’s local wage tax doesn’t exempt 401(k) deferrals – but you can usually get a credit on your state return to avoid double taxation. While not a state-level issue per se, it’s worth noting if you live in a city with its own income tax.

Bottom line: Know your state’s stance. Most people will get the immediate state tax deduction with Traditional contributions and owe state tax on Traditional withdrawals (and conversely, pay state tax now for Roth, but get none on withdrawal).

But if you live in a state like Pennsylvania (tax now, not later) or Illinois (tax now, not later for retirees) or you expect to move between states, factor that in. State tax differences can tilt the scales on whether pre-tax or post-tax contributions yield more overall benefit.

Traditional 401(k) (Pre-Tax): Save on Taxes Now, Pay Later

A Traditional 401(k) uses pre-tax contributions. Let’s dig into how it works and why many people choose this option:

• Immediate Benefits of Pre-Tax Contributions: Every dollar you put into a Traditional 401(k) lowers your current taxable income. This can result in a significantly lower federal income tax bill for the year. For instance, contributing the maximum (say $23,000) when you’re in the 24% tax bracket saves you about $5,520 in federal taxes for that year (24% of $23k). That is money you would have paid in taxes, but instead, it’s now growing in your retirement account. This tax savings can even help you contribute more – since pre-tax contributions effectively cost you less out-of-pocket than the same amount in Roth. (E.g., $100 contributed pre-tax costs a 24% bracket person only $76 net, because $24 would have gone to taxes; $100 Roth costs the full $100 net.)

• Tax-Deferred Growth: Inside a Traditional 401(k), your investments compound without any taxes along the way. You only pay taxes when you withdraw money. If you leave the money untouched until retirement, all the growth is tax-deferred, allowing potentially faster accumulation compared to a taxable account.

• Taxes in Retirement: When you do take distributions from a Traditional 401(k), those withdrawals are fully taxable as ordinary income (both contributions and earnings). The expectation for Traditional 401(k) contributors is that you might be in a lower tax bracket in retirement than while working. If that holds true, you saved tax at a high rate initially and pay at a lower rate later – a win-win. However, if you end up in a similar or higher tax bracket in retirement, those withdrawals could be costly. It’s important to project your likely retirement income (including Social Security, pensions, etc.) to gauge what tax bracket you might be in later.

• Required Distributions: As mentioned, Traditional 401(k)s require you to start taking distributions by age 73 under current law (if you’re retired – if you keep working past that age at the same employer, RMDs from that employer’s 401k can be delayed until you retire). These RMDs can be a downside if you don’t need the money yet, as they force you to take taxable income and possibly bump you into a higher bracket or increase Medicare premiums. It’s worth planning for RMDs if you’ve accumulated a large pre-tax balance.

• Who Benefits Most from Traditional 401(k): Generally, people who are in higher income-tax brackets now and expect their income (and tax rate) to drop in retirement gravitate toward pre-tax contributions. Also, if you simply need the tax break to afford to save at all, Traditional is helpful. High earners often max out pre-tax 401(k)s to reduce taxable income (especially if they’re in the 32%, 35%, or 37% federal brackets). Also, anyone trying to lower their adjusted gross income (AGI) for other reasons (like qualifying for certain tax credits, avoiding Medicare surcharges, reducing student loan payment calculations, etc.) might favor pre-tax contributions. Every dollar in a Traditional 401(k) reduces your AGI, whereas Roth contributions do not.

• Example Scenario – Traditional Advantage: Let’s say you’re 45, in the 35% federal tax bracket, and you live in California (high state tax). You expect to retire at 65 and live a quieter life on less income, maybe in a state with lower taxes. Using a Traditional 401(k) now means each $1,000 you contribute saves you $350 in federal tax (plus state tax savings, say another ~$100 in CA). In retirement, if you drop to, for example, the 22% bracket and move to a lower-tax state, each $1,000 you withdraw might incur only $220 in federal tax (and minimal state tax). You saved $350+ now and pay $220 later – that $130 difference per $1,000 is pure tax arbitrage gain. Traditional was very beneficial in this case.

However, Traditional 401(k) contributions are not universally best – they come with trade-offs which we’ll outline in the comparison section. Now, let’s look at the other side: Roth 401(k) contributions.

Roth 401(k) (Post-Tax): Pay Taxes Now, Enjoy Tax-Free Later

The Roth 401(k) is the newer kid on the block (introduced in 2006 via federal law) and has become increasingly popular. Here’s how Roth 401(k) contributions work and why you might choose them:

• No Upfront Tax Break: With a Roth 401(k) contribution, you don’t get a tax deduction now. Those contributions come straight out of your take-home pay after withholding. This means your current-year tax bill will be higher compared to making the same size contribution pre-tax. For example, contributing $10,000 Roth when you’re in the 24% bracket means you pay an extra $2,400 in taxes that you wouldn’t have paid if that were Traditional. It can feel painful in the short term, but that pain is an investment in future tax freedom.

• Tax-Free Withdrawals: The payoff comes later. If you follow the rules (the Roth account has been open at least 5 years and you’re 59½ or older when withdrawing, or meet another qualifying condition), your withdrawals from a Roth 401(k) are tax-free. That includes both the money you contributed and all the earnings on those contributions over decades. In a sense, you’re prepaying the tax on your contributions so that your investment growth is never taxed. This can be incredibly powerful if your account grows significantly. Imagine contributing $100,000 over the years to a Roth 401(k) and it doubles to $200,000 by retirement – the entire $200k can be withdrawn with $0 tax, whereas in a Traditional 401(k) that $200k would all be taxable upon withdrawal.

• Great for Future High Tax Situations: Roth contributions make a lot of sense if you suspect that you might be in a higher tax bracket in retirement than you are now. This is often the case for young professionals who are early in their careers. For instance, a 25-year-old making $50k might only be in the 12% federal bracket now. It could be very wise for them to contribute Roth 401(k) because later in their career or retirement, they might be in the 22% or higher bracket, or tax rates in general could rise. By doing Roth, they lock in taxes at 12% on those contributions now, and avoid potentially paying much more later on growth. Likewise, if you simply believe that tax rates across the board may increase in the future (due to federal debt or changing laws), Roth is a way to “tax-proof” part of your retirement.

• No RMD Worries: As of 2024, Roth 401(k)s do not have required minimum distributions for the original account owner. This is a major advantage for those who might not need the money at age 73 – you can let it grow further or leave it to your heirs without forced taxable withdrawals (heirs will have to withdraw over 10 years, but it remains tax-free for them). With Traditional, you’d have to start drawing down. This allows the Roth money potentially to grow untouched for a longer period, increasing the tax-free benefit.

• Psychological/Spending Benefit: Some retirees like Roth because all the money in the account is net money – when they withdraw $1,000, they get the full $1,000. With Traditional, you always have to remember that maybe 20-30% of that money is effectively the government’s (due as taxes when withdrawn). With Roth, what you see is what you get, making budgeting in retirement simpler. You won’t be as worried about “taxes on that withdrawal” when deciding to spend money.

• Who Benefits Most from Roth 401(k): People who are in a lower tax bracket now relative to what they expect later are prime candidates. Young individuals early in career, or those temporarily in a low-income year (for example, someone who went back to school, or had a sabbatical year with less income, etc., might switch to Roth contributions while their income is low). Roth is also great if you have a long time horizon for growth – the more years of compounding that can be forever tax-free, the better. Additionally, if you have concerns about RMDs or estate planning, Roth gives more flexibility. High-income earners who expect to have a very large pension or other income in retirement might also do some Roth to avoid stacking even more taxable income later. And if you just prefer the idea of hedging against future unknown tax hikes, Roth provides that peace of mind.

• Example Scenario – Roth Advantage: Imagine a 30-year-old making $60,000 (22% marginal federal tax bracket) who believes their income at age 60 could be much higher, or at least that tax rates might increase. They contribute $10,000 to a Roth 401(k) this year, paying about $2,200 in taxes on that (which they would have avoided if done pre-tax). That $10k, invested over 30 years, could grow to say $100,000 by age 60 (not unrealistic with steady contributions and compounding). Because it’s Roth, that entire $100k can be taken out tax-free. If instead they had done Traditional, that $100k would be fully taxable – if they’re in the 25% bracket in retirement, they’d pay $25k in taxes on it. Paying $2.2k now to potentially save $25k later is a pretty good trade-off! Essentially, Roth lets you invest more after-tax dollars for the future since you’ve prepaid the taxes.

One thing to note: contributing Roth does mean you need to have the cash flow to cover the taxes now. Some people split contributions (some pre-tax, some Roth) to balance current vs future tax benefits. Next, we’ll directly compare Traditional and Roth 401(k) side-by-side and look at pros and cons.

Traditional vs Roth 401(k): Key Differences at a Glance

It’s helpful to see the differences between pre-tax and post-tax 401(k) contributions in a clear comparison. Below is a side-by-side look at how Traditional and Roth 401(k)s stack up on major factors:

As the table shows, the core trade-off is between an upfront tax break (Traditional) and tax-free money later (Roth). Traditional is like getting a tax coupon today; Roth is like buying tax insurance for the future.

Neither is universally better — it truly depends on your personal circumstances. Many people actually utilize both types during their careers to diversify their tax situation (some years or portion pre-tax, some Roth). We’ll discuss how to choose in various scenarios soon. First, let’s summarize the general pros and cons of each approach.

Pros and Cons of Pre-Tax vs Post-Tax 401(k) Contributions

It’s important to weigh the advantages and disadvantages of Traditional and Roth 401(k)s. The table below outlines the key pros and cons of each option:

Pros and cons at a glance: Traditional 401(k) is fantastic for reducing today’s taxes and is generally simpler to see the benefit immediately. Roth 401(k) asks you to sacrifice now in order to reap big rewards later – essentially delaying your gratification until retirement by prepaying taxes. Many financial advisors recommend a mix: take the tax break when you need it, but also build some tax-free Roth savings for flexibility.

Now, how do you decide which one you should do? Let’s discuss scenarios and guidelines for choosing pre-tax vs post-tax contributions.

When to Choose a Traditional 401(k) (Pre-Tax)

Traditional 401(k) contributions can be the better choice in several scenarios:

• High Current Income/Tax Bracket: If you’re currently in a high tax bracket, the immediate tax savings are extremely valuable. For example, if you’re in the 35% federal bracket, Traditional contributions give you a 35% “return” right off the bat via tax savings. It often makes sense to defer taxes at that high rate and hope to pay at a lower rate later. High earners (e.g., household making $250k, $300k+) often prioritize maxing pre-tax contributions.

• Lower Expected Income in Retirement: If you anticipate that your retirement income will be significantly less than it is now (perhaps you won’t have a huge pension, and Social Security plus withdrawals will be modest), then you’ll likely be in a lower tax bracket after you stop working. In that case, Traditional 401(k)s let you take the tax break now when your rate is higher and pay taxes later at a lower rate. This is common for people in peak earning years who plan a simpler retirement lifestyle.

• Need the Tax Break to Save More: Some people simply need the immediate tax relief to make ends meet or to free up cash for other goals. The tax savings from Traditional contributions might enable you to, say, afford your mortgage or invest in a brokerage on the side. If doing Roth would squeeze your budget too much, taking the pre-tax route can strike a balance between saving for retirement and meeting current needs.

• Qualifying for Other Benefits: Lowering your adjusted gross income through Traditional contributions can help in various ways. For instance, it might help you qualify for a partial Roth IRA contribution (since Roth IRA eligibility phases out at higher incomes – note: Roth 401k itself has no income limit, but Traditional 401k contributions could indirectly help you qualify for a Roth IRA by reducing AGI). Or it might keep you below thresholds for healthcare subsidies, education tax credits, or avoid the Medicare high-income surcharge (IRMAA) in retirement if you’re right around the limit. Traditional contributions can be a tool for tax bracket management.

• Short Time Horizon to Retirement: If you’re only a few years from retirement and haven’t built up a huge nest egg, staying with Traditional might make sense, especially if you’re trying to max out contributions in your peak earning years. With not many years of growth left, the tax-free benefit of Roth is smaller, and you might value immediate savings more. Plus, if retirement is close, you likely have some sense of what your income will be then.

• State Tax Situations Favorable Now: If you live in a high-tax state now and will move to a no-tax state later (for example, work in New York, retire in Florida), Traditional contributions give you a state tax break when it’s most needed. You avoid NY state tax now and won’t pay any state tax in FL on withdrawal. Traditional clearly wins in that scenario.

Summary: Choose Traditional 401(k) contributions when you benefit substantially from the tax deduction today and expect to be in an equal or lower tax environment in retirement. It’s about grabbing the bird in the hand (tax savings now) especially if that bird is quite large. Just be mindful of the eventual tax bill in retirement and plan for those RMDs.

When to Choose a Roth 401(k) (Post-Tax)

Roth 401(k) contributions shine in scenarios like these:

• Early Career or Lower Current Income: If you’re in your 20s or 30s and not making a huge salary yet, your tax bracket is likely on the lower side. This is a perfect time to contribute to Roth. You won’t miss a deduction that much at 12% or 22% tax rates, and you’ll set yourself up with tax-free money when you’re older (and presumably richer). The decades of compounding ahead are all going to be tax-free – the younger you start Roth contributions, the more powerful they become.

• Expecting Higher Income Later: Perhaps you’re on a career track (like a medical resident, junior attorney, etc.) where you know your income (and tax bracket) will jump in a few years. During these lower-earning years, Roth 401(k) is extremely valuable. You lock in taxes at a lower rate now on contributions. Later, when you’re in a top bracket, you can switch to Traditional if you want. Many people strategically do Roth contributions when young or lower-paid, then shift to pre-tax as their income grows – capturing the best of both worlds over time.

• Long Investment Horizon: If you have a lot of years for your investments to grow (say 20, 30, 40 years), Roth can result in a much bigger after-tax nest egg. Think about it: $1 in a Roth account could grow to $10 by retirement and none of that $9 gain will be taxed. In a Traditional, that $9 gain will all be taxed as income when you withdraw. The more growth potential, the more the Roth’s tax-free advantage matters. That’s why Roth is often recommended for younger folks or anyone with many years before using the money.

• Concerned About Future Tax Rates: If you suspect that federal (or state) tax rates might increase across the board in the future (due to legislative changes or fiscal needs), doing Roth now is a way to “lock in” today’s rates. There’s a current environment of historically moderate tax rates (the top federal rate is 37% now, whereas in the 1980s it was 50% or higher, and in the 1960s, 70%!). If you think we might revert to higher taxes, paying at today’s rates on your contributions could be wise. Similarly, if you plan an expensive retirement (lots of income from investments, multiple income streams), you might be in a high bracket even without wage income. Roth gives you a pool of money that’s insulated from those high tax rates.

• No Need for Tax Deduction Today: Maybe your current income is such that you’re comfortable with your tax bill, or you’re already in a 0% tax situation (for example, a young person whose standard deduction covers their income, or someone in a very low bracket). If the deduction today isn’t useful to you, why take it? Opt for Roth and enjoy tax-free withdrawals later when it could matter more.

• Estate Planning and RMD Considerations: If leaving money to heirs or maximizing what you pass on is a goal, Roth can be advantageous. Heirs who inherit a Roth 401k/IRA still have to withdraw the funds within 10 years (due to recent rule changes), but they won’t owe tax on those withdrawals (whereas inheriting a Traditional 401k means they owe income tax on distributions). Also, since Roth 401k now has no RMDs for the original owner, you could let it grow until death if you don’t need it, and your heirs get a larger sum (still tax-free to them). If you dislike the idea of forced distributions (RMDs) potentially bumping you into higher brackets in your 70s, a Roth eliminates that issue.

• High Earners Who Can Afford Tax Now: This sounds counter-intuitive, but some high-income folks still choose Roth for part of their 401k. For instance, if you’re maxing out your 401k anyway, you might put at least some of it into Roth to diversify your tax profile. Also, starting in 2024, if you’re age 50+ and earned over $145,000 the previous year, any catch-up contributions must go into Roth by law (SECURE 2.0 rule) – meaning even high earners will end up with Roth money for those extra contributions. While many high earners stick with pre-tax for the bulk, adding Roth contributions (especially if you expect a high-tax retirement) can be a form of tax risk management.

Summary: Choose Roth 401(k) contributions when you value tax-free growth and expect the tax trade-off to favor paying now instead of later. This is often when your current tax rate is low, you have a long time to compound, or you foresee equal/higher taxes down the road. Roth is about delayed gratification and planning ahead to beat the tax man in the long run.

Can You Have Both? Mixing Traditional and Roth Contributions

A common question is: do you have to pick exclusively one or the other? No, you don’t.

Many employer plans allow you to split your contributions between Traditional and Roth in any proportion you want. For example, you could contribute 50% of your contribution as pre-tax and 50% as Roth, or any other split, as long as the total doesn’t exceed the annual limit.

Mixing contributions can be a great strategy to build “tax diversification.” Since the future is uncertain, having some money that will be taxed later and some that’s tax-free later gives you flexibility.

In retirement, you could choose which account to withdraw from based on the situation (for instance, maybe in a certain year you withdraw more from Roth to avoid pushing yourself into a higher bracket).

Some financial advisors recommend a mix especially if you’re on the fence or in a middle tax bracket.

Example: A couple in the 24% bracket might do half Traditional (to at least get some current break) and half Roth (to hedge against future taxes). This way, they get a partial tax benefit now and still grow a tax-free pot for later.

Remember, it’s not an irrevocable choice – you can adjust your contribution elections, usually at least once a year or even any pay period, depending on your plan’s rules. You can also change strategy as you transition through different life phases or if tax laws change.

Now, let’s address specific scenarios and frequently asked questions, as these often help illustrate the considerations in real-world terms.

High-Income Earners: Traditional or Roth 401(k)?

If you’re a high-income earner (say in the 32% or higher federal tax bracket, often a six-figure earner), the decision between pre-tax and Roth can be tricky. Here are special considerations for you:

• Value of Tax Deferral: At high incomes, contributing the max pre-tax ($22,500 or $23,000) saves a lot in taxes now. For example, at 35%, maxing a $23k contribution saves about $8,000 in federal tax in one year. That immediate benefit is hard to pass up. Many high earners prioritize Traditional contributions to maximize current-year savings and invest the tax savings elsewhere. Additionally, reducing taxable income can help avoid things like phaseouts (for itemized deductions, which mostly were eliminated but may come back, or the 3.8% Medicare surtax on investment income if you can get below certain thresholds).

• Roth 401(k) has no income limit: Unlike a Roth IRA which you can’t directly contribute to once your income is above a certain level (e.g., about $240k for a married couple in 2023), a Roth 401(k) has no income cap. So a high earner can still choose Roth 401k if they want. This is one way for high-income individuals to get money into a Roth environment (another way is via backdoor Roth IRAs or mega backdoor 401k contributions, but that’s another topic). If you’re a high earner who wants more tax-free growth, the Roth 401k is available to you as long as your employer offers it.

• Future Tax Scenario: A lot of high earners expect to maintain a comfortable lifestyle in retirement, which could mean staying in a relatively high tax bracket even without salary. For example, if you’ve saved a lot, your RMDs plus Social Security might still put you in a higher bracket later. If you anticipate a pension or have substantial passive income, you might not drop much in tax rate. In that case, doing some Roth now might actually save you taxes in the long haul. Some high earners fear a “tax time bomb” in their 70s when large Traditional 401k/IRA balances lead to large RMDs. Sprinkling in Roth contributions (or converting some Traditional to Roth in early retirement) can mitigate that.

• New Rules for Catch-Up Contributions: Starting in 2025, if you are a high earner (defined as over $145,000 in wages from the employer in the previous year, inflation-adjusted) and age 50 or over, federal law will require your catch-up contributions ($7,500 extra) to be Roth. This is part of SECURE 2.0 Act changes. They actually delayed this requirement to 2026 for administrative reasons, but it’s coming. So if you’re 50+ and a high earner, you may end up with Roth contributions whether you like it or not for those extra amounts. This means even die-hard pre-tax maximizers will have some Roth portion starting mid-decade if they utilize catch-ups.

• Mega Backdoor Roth (After-Tax Contributions): Many high-income folks who max out the normal 401k limit look for additional space to save. Some employer plans allow after-tax contributions beyond the $23k limit, up to the overall plan limit ($69k). Those after-tax contributions (which are different from Roth – they are non-Roth after-tax) can then be converted inside the plan to Roth or rolled out to a Roth IRA (the so-called mega backdoor Roth strategy). If you’re in this fortunate scenario, you can effectively get even more money into Roth. Usually, high earners at big tech or large companies might have this option. This is a way to contribute beyond the normal limit once you’ve maxed pre-tax/Roth. If you have this, you’re likely already saving aggressively and thinking of Roth conversions, which is beyond basic pre-tax vs Roth contributions — but it’s good to be aware of.

In summary for high earners: The traditional advice is to favor pre-tax to minimize your hefty tax bill now. That’s often sound, especially if you invest the tax savings wisely. However, don’t dismiss Roth entirely – having even a portion of your savings growing tax-free can provide future flexibility. Some high-income individuals do, for example, 80% Traditional, 20% Roth, just to diversify.

And remember, if you retire early (common in FIRE community), you can do Roth conversions of your Traditional money at lower tax rates during those early retirement years.

So Traditional now with a plan to convert to Roth later can be a valid strategy (a “two-step Roth” approach). It ultimately comes down to detailed planning and running the numbers for your situation.

Self-Employed Individuals: 401(k) Contribution Strategies

Self-employed people (including freelancers, small business owners, independent contractors) often use Solo 401(k) plans or other retirement accounts. The pre-tax vs Roth decision has some unique angles for the self-employed:

• Solo 401(k) Options: If you have a Solo 401(k) (also called an individual 401k), you are both the employee and the employer. As the employee, you can contribute either pre-tax or Roth (if you set up the plan to allow Roth, most do). The same annual deferral limits apply ($23k, etc.). As the employer, you can also make an “employer contribution” (profit-sharing) of up to 20-25% of your net business profit, but employer contributions can only be pre-tax. This means even if you do all Roth for your employee portion, any employer contributions will be traditional. Keep this in mind: you can end up with both pre-tax and Roth money in a Solo 401k by design.

• Income Variability: Self-employed income can fluctuate year to year. This actually creates planning opportunities. In high-income years, you might want to take full advantage of pre-tax contributions (both employee deferral and employer profit-share) to bring down your taxable income. In low-income years, you might switch to Roth contributions, since the tax deduction is less valuable. Unlike a W-2 worker whose salary might be steady, you have more reason to change your 401k contribution type based on the year’s profit.

• Deductions Already Available: Many self-employed individuals have business deductions that lower their taxable income (expenses, Section 179 depreciation, home office deduction, etc.). If those deductions already bring you into a low tax bracket, then adding a Roth contribution on top (no further tax deduction) could make sense – because you’re already not paying much tax. Conversely, if after deductions you still have a high taxable income, pre-tax 401k contributions can be a crucial tool to manage your tax bill.

• Solo 401k Contribution Limits: A solo 401k allows large contributions in good years because you can combine employee and employer portions. For example, if a 40-year-old sole proprietor earns $150k in net self-employment income, they can contribute $22.5k as employee (pre-tax or Roth) plus around $27k as employer pre-tax (roughly 18% of net after self-employment tax), for a total of ~$49k. Only the $22.5k could be Roth; the rest is pre-tax by necessity. So, a self-employed person can sock away a lot pre-tax. If you want to maximize Roth, you’re limited to the employee portion (unless you do the after-tax to Roth conversion if your solo plan allows Mega backdoor contributions, which some do). It may be sensible to do a mix: max out the employer (pre-tax) and then choose Roth for the employee portion if that fits your tax strategy.

• Tax Savings Reinvested: One advantage self-employed folks cite for pre-tax is that every dollar saved in taxes can be reinvested into the business or other investments. For example, saving $5k in taxes from a pre-tax contribution might allow purchase of new equipment or funding a marketing campaign that grows your business. If that $5k tax savings can generate more income, it might outweigh the benefit of Roth’s future tax savings. It’s a personal call on where the best use of funds is.

• Future Exit/Business Sale: Think about your endgame. If you plan to sell your business or have a big payout later, that could bump your retirement tax bracket up (maybe a reason to do some Roth now). Alternatively, if you’ll wind down with minimal income except what you draw from savings, that might be a lower tax environment, favoring pre-tax now. Self-employed retirement planning is closely tied to your business planning.

In short: Self-employed individuals have flexibility. Use that to your advantage by choosing pre-tax vs Roth year-by-year based on profits.

Ensure your solo 401k plan is set up to allow Roth if you want that option. And remember that part of your contributions (the “employer” portion) will always save you taxes now. Many self-employed end up with a blend automatically, which isn’t a bad outcome.

Corporate Employees: Making Smart 401(k) Choices

If you’re a corporate or company employee, you likely have a 401(k) through your employer. Here are some tips and nuances for choosing between Traditional and Roth as an employee:

• Check If Roth 401(k) Is Offered: First, not all employer plans offer a Roth 401(k) option, though a majority now do. If yours does, you will typically have to actively elect Roth contributions – otherwise, the default is usually pre-tax. If your plan doesn’t offer Roth and you want to contribute post-tax, one alternative is contributing to a Roth IRA (income limits apply) or lobbying your employer to add a Roth 401k feature.

• Employer Match Mechanics: As mentioned, employer matching contributions always go into the pre-tax side of your 401(k) by default. That means if you contribute Roth, you’ll still see a Traditional portion in your account for the match. For example, you contribute $10k Roth, employer matches $5k – your account will have $10k in Roth 401k and $5k in Traditional 401k. The traditional portion will be taxable when withdrawn. Some employees are surprised by this, but it’s normal. (Legally, they can offer the match as Roth if taxes are handled, but few plans do yet.)

• Young Employee Considerations: Many company plans auto-enroll new employees into a 401k, often into a default target-date fund and perhaps at a default 3-5% contribution, usually pre-tax. It’s worth evaluating early in your career if Roth is better. Often, young employees in entry-level jobs should switch to Roth contributions to set themselves up for long-term tax-free growth. Don’t just stick with pre-tax because it was the default – consider your situation. A lot of young professionals making, say, $50k-$70k might actually be better off with Roth 401k contributions, but they stick with pre-tax out of inertia.

• Mid-Career and High Earner Employees: As your salary grows, you might shift strategy. A common approach: early career do Roth, later career do Traditional. For mid-career folks in, say, the 24% or 32% bracket, it could go either way, which is why splitting contributions can be smart. Pay attention during open enrollment or when you get raises – that’s a good time to reassess. If a raise pushes you into a higher bracket, maybe start allocating more to pre-tax.

• After-Tax Contributions (Mega Backdoor): Some large employers offer an additional feature: after you max your $23k, they allow after-tax contributions up to the overall $69k limit, and often automatic in-plan conversion to Roth. This is known as a Mega Backdoor Roth 401k. If your employer offers this and you have the cash flow to take advantage, it’s a powerful way to get a lot more into Roth. This is usually of interest to high earners who want to save above the normal limits. Check your plan documents or ask HR if after-tax contributions are allowed – many employees don’t even realize they have this option. If available, it essentially gives you a third bucket in the 401k: after-tax (non-Roth) that can become Roth via conversion. This is an advanced strategy and a nice perk if you have it.

• Utilize Resources: Many companies offer tools or even free financial advisor consultations as part of their 401k plan benefits. It might be worth running your numbers by a financial planner or using online calculators that some 401k providers have. They can show you the impact of Roth vs Traditional on your paycheck and projected outcomes at retirement.

• Payroll and Withholding Adjustments: If you do switch a large portion to Roth, remember to adjust your tax withholding if necessary. When you contribute pre-tax, you needed less tax withheld from your paycheck; if you switch that to Roth, your take-home drops because more is taxed. You might need to increase allowances or adjust W-4 to avoid over-withholding. Conversely, switching to more pre-tax might increase take-home pay (or a tax refund) which you could then allocate to other goals.

Overall: Corporate employees should actively manage their 401k choices rather than set-and-forget. Take advantage of any employer match (that’s free money, always contribute enough to get the full match regardless of Roth vs Traditional decision). Then, choose the tax treatment that aligns with your career stage and future plans. You have the flexibility to change your election if needed, so revisit it every year or two or when life circumstances change (marriage, big raise, moving state, etc.).

Finally, let’s address some frequently asked questions that often come up on forums like Reddit, Bogleheads, and others when this topic is discussed.

Frequently Asked Questions (FAQ)

Q: Should I contribute to a Roth 401(k) if I’m a high earner in the top tax bracket?
A: Generally, high earners favor pre-tax to reap immediate tax savings. However, adding some Roth can hedge against future tax increases. It’s often recommended to do mostly pre-tax and a bit of Roth for flexibility.

Q: Can I contribute to both a Traditional and Roth 401(k) in the same year?
A: Yes. You can split your 401(k) contributions between Traditional and Roth in any ratio. The only rule is that the combined total can’t exceed the annual limit ($23,000 for 2024, etc.).

Q: Is there an income limit for Roth 401(k) contributions?
A: No. Anyone, regardless of income, can contribute to a Roth 401(k) if their employer offers it. This is different from Roth IRAs, which have income eligibility caps.

Q: Do employer matches go into Roth if I contribute Roth?
A: No. Employer matching contributions always go into the pretax Traditional 401k portion (unless your plan explicitly offers a Roth match and you elect to pay the taxes). So even if all your contributions are Roth, you’ll have a traditional portion from matches.

Q: What if I’m not sure about my future tax bracket?
A: If uncertain, you can diversify. Contribute some money pre-tax and some Roth. This gives you both tax-deferred and tax-free sources in retirement, providing flexibility no matter what happens with future tax rates.

Q: Can I change my 401(k) contributions from Traditional to Roth or vice versa later on?
A: Absolutely. You can adjust your contribution election (usually through your plan’s website) at least annually, and often anytime. Many people switch strategies as their income or tax situation changes.

Q: Are withdrawals from a Roth 401(k) truly tax-free?
A: Yes, if they are qualified withdrawals (account open 5+ years and age 59½+ or another qualifying event). Both contributions and earnings come out tax-free federally (and typically state tax-free as well). Non-qualified withdrawals may incur tax on the earnings portion and a penalty.

Q: I’m nearing retirement. Is it too late to start Roth contributions?
A: It depends. If you’re only a few years out, the bulk of your savings might already be traditional. Starting Roth now gives you tax-free money later, but you must weigh the lack of immediate deduction. Also, remember the 5-year rule: even if you’re over 59½, a Roth 401k needs to be held 5 years to get tax-free earnings. If you don’t have 5 years, you could roll it to a new or existing Roth IRA (the IRA’s 5-year clock or your oldest Roth IRA clock would apply). It’s not necessarily “too late,” but the benefits are smaller short-term.

Q: How do state taxes affect Roth vs Traditional?
A: In most states, Traditional contributions give you a state tax break and Roth contributions are taxed now. In retirement, most states tax Traditional withdrawals but not Roth. A few states (like Pennsylvania) tax contributions now but not later, effectively treating even Traditional 401k like Roth for state purposes. Consider where you live now and where you’ll retire – a move can change the state tax impact.

Q: If I plan to retire early (say at 55) and live off savings before 59½, should I factor that into my choice?
A: Yes. If retiring early, you might have low-income years in your 50s/60s where you could do Roth conversions of any traditional money at low tax rates. In that case, doing Traditional now and planning conversions later could be optimal. Alternatively, building up Roth savings now means you can withdraw contributions (from Roth IRAs, not 401k) or use the Rule of 55/72(t) strategies without worrying about taxes. Early retirement often involves a detailed plan of how to draw down assets tax-efficiently.

Q: What is the “5-year rule” I hear about for Roth 401(k)?
A: The 5-year rule refers to needing to have the Roth account open for five tax years before earnings can be withdrawn tax-free (assuming age 59½ or other qualifying condition is also met). For Roth 401(k), the clock starts with your first contribution. If you roll a Roth 401k into a Roth IRA, the IRA’s clock (or your earliest Roth IRA’s clock) will apply. Essentially, don’t start Roth contributions expecting to withdraw tax-free a year later; it’s meant for long-term.

Q: Should I consider a Roth IRA instead of Roth 401(k)?
A: You can do both! A Roth 401(k) allows higher contributions and employer matches, but a Roth IRA (if you qualify) offers more investment choices and no RMDs at all. Some use Roth 401k for primary saving and also fund a Roth IRA on the side (through direct contributions or backdoor Roth if over income limit). Both Roth 401k and Roth IRA grow tax-free; just different limits and rules. One key difference: Roth IRA contributions (not earnings) can be withdrawn anytime without tax or penalty, giving them a bit more liquidity/flexibility. Roth 401k withdrawals aren’t as flexible until age 59½.

Q: Could tax laws change and ruin the advantages of Roth?
A: Tax laws can always change, but Roth withdrawals being tax-free is pretty entrenched in law and would be politically challenging to undo for existing contributions. There’s always some uncertainty (for example, introducing new consumption taxes or other schemes), but generally Roth is considered fairly safe from adverse changes. Traditional accounts face uncertainty too (tax rates could increase). It’s about diversification and not putting all eggs in one basket, tax-wise.