Choosing between a Roth 401(k) and a Traditional (Pre-Tax) 401(k) is one of the most significant decisions in retirement planning. This is a strategic conversation I have with every client at some point, and while the right answer might vary based on financial situation, deploying the right strategy can impact your long-term tax burden and financial flexibility.
Roth accounts offer tax-free growth and withdrawals, eliminating the need to pay taxes on earnings in retirement. They also have no required minimum distributions (RMDs), allowing funds to continue growing tax-free.
A Roth 401(k) can be beneficial for individuals in a lower tax bracket today who expect higher earnings in the future. Young professionals or those early in their careers often benefit from locking in a lower tax rate.
By contributing to a Roth now, you can hedge against future tax increases and provide tax-efficient wealth transfer to heirs. Tax planning is a major factor for retirement income planning, as higher taxable income increases Social Security tax exposure and potentially increases Medicare Parts B & D premiums.
Consider two investors, Alex and Jordan, who each contribute $10,000 annually for 30 years with a 7% return. Note: This is intended to be a simple example, which does not include state and local taxes, income fluctuations, or other areas of financial planning.
Alex contributes to a Roth 401(k) and pays taxes upfront. Jordan contributes to a traditional 401(k) and defers taxes.
After 30 years:
Alex accumulates $1.01 million tax-free. Jordan’s pre-tax balance grows to $1.36 million, but his first year RMD will be roughly $83,000, pushing him into the 24% tax bracket (at today’s rates and IRS life expectancy factor), resulting in a tax bill of nearly $23,000. This is way more than his annual tax savings from making the pre-tax contributions.
Over time, Alex benefits from greater flexibility and lifetime tax savings. To add insult to injury, in this example Jordan’s tax hit at retirement outweighs the value of the initial tax savings, reducing his effective after-tax wealth.
Note: Alex’s lower balance assumes a 22% tax rate before the contribution is made.
A Roth conversion allows individuals to move pre-tax funds into a Roth account and pay taxes now in exchange for tax-free growth. This strategy is most effective in:
Lower-income years: convert pre-tax retirement funds to a Roth IRA while staying in a lower tax bracket, minimizing the upfront tax cost. Converting in a year with reduced earnings, business losses, or early retirement lowers your tax rate, since the IRS taxes the conversion amount as ordinary income.
Early retirement: you may have little to no earned income, keeping you in a lower tax bracket before required minimum distributions (RMDs) begin at age 73. By converting pre-tax retirement funds to a Roth IRA during these lower-income years, you can minimize the tax cost of conversion while allowing the money to grow tax-free for the rest of your life.
Market downturns: your investments have temporarily declined in value, allowing you to convert a larger portion of assets at a lower tax cost. Since the IRS taxes the converted amount as ordinary income, converting when account values are down reduces your tax bill while still allowing you to benefit from tax-free growth when the market recovers.
For high-income earners, a backdoor Roth IRA allows contributions to a non-deductible traditional IRA, followed by a conversion to a Roth IRA.
Some 401(k) plans also allow mega backdoor Roth contributions. This allows high earners to make after-tax contributions and then roll those funds into a Roth IRA or Roth 401(k). This strategy enables up to $70,000 in total 401(k) contributions (2025 limit, including employer match), significantly boosting tax-free retirement savings. It’s especially beneficial for those with high incomes and minimal employer contributions, allowing for accelerated Roth savings without income restrictions.
You’re already in a high tax bracket and expect lower income in retirement: pre-tax contributions may provide better immediate benefits.
If you are close to retirement and won’t have much time for tax-free growth, a traditional 401(k) may be more practical.
If reducing taxable income today is a priority, pre-tax contributions may offer greater short-term savings.
Roth strategies provide long-term tax benefits but may not be the right fit for everyone. Consider your current tax situation, expected future income, and retirement goals before making a decision.
Ready to discuss how a Roth strategy fits into your financial plan?
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Author: Dale Shafer II, CFP®, CBEC®, APMA®
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