Traditional vs Roth 401(k): What’s the Real Difference?

If you’ve ever frozen up completing your 401(k)-enrollment wondering whether to choose “traditional” or “Roth,” you’re not alone. This trips up a lot of people, but it’s simpler than it looks.

It All Comes Down to Timing

The choice between a traditional and Roth 401(k) contribution isn’t about which account is “better.” It’s about when you want to receive the tax benefits.

Traditional 401(k): You get the tax benefit now. Whatever you contribute in a given year lowers your taxable income by that same amount, so you don’t pay income tax on those dollars today. The money then grows tax-deferred – no taxes along the way. But when you eventually withdraw it, that money counts as ordinary income and is taxed then.

Roth 401(k): It works the opposite way. You pay taxes on your contributions in the year you contribute. It then grows over time, and when you withdraw the money in retirement, you owe no income tax. Not on what you contributed, and not on any of the earnings it generated, considering it’s a qualified distribution. *

Can You Contribute to Both?

Yes. You’re not locked into one or the other. Say you want to contribute 12% of your paycheck to your 401(k) – you can split that however you like between traditional and Roth sources: 10%/2%, 6%/6%, or any other combination. Once contributed, those dollars stay separated in your account permanently, each keeping its own tax treatment.

What About Income Limits?

A common misconception is that Roth contributions have income limits. That’s true for a Roth IRA, held outside a 401(k). The only limits inside a 401(k) are the IRS’s annual contribution caps, which apply regardless of income and regardless of whether you choose traditional, Roth, or a mix of both.

The Bottom Line

Traditional and Roth aren’t competing strategies; they’re two timing choices for the same tax benefit. Many people benefit from using both, spreading their tax exposure across today and retirement.

Not sure which mix is right for you? Contact your Moneta advisor for help thinking through decisions like this as part of your broader financial plan. Learn more about Smart Steps.

*Qualified distribution: Withdrawal is taken at age 59 ½ or older and 5 or more years following your first Roth contribution.

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