Traditional vs. Roth 401(k): How to Choose the Best Option
Deciding between a traditional 401(k) and a Roth 401(k) is a decision that impacts your money now and what you’ll have in retirement. Learn how to choose which one may be right for you.
Key Takeaways
According to the Plan Sponsor Council of America, 95% of retirement plans offer traditional and Roth contribution options.
Most participants choose the traditional option, but that may be due to a lack of understanding about Roth 401(k)s.
There are a few decision points when choosing a traditional or Roth 401(k), but the main difference is whether you want to pay taxes now or later.
More retirement plans than ever offer Roth contributions to their participants. Still, some 80% opt for traditional contributions.¹ That may be due to a lack of understanding about the Roth option. Or it may mean more people are interested in the tax break they receive now with the traditional choice.
Regardless of popularity, it’s in your best interest to choose the type of contribution that is right for you now and for your retirement later. Start by understanding how each option works and comparing them side by side.
Traditional 401(k) vs. Roth 401(k): How They Work
Traditional and Roth 401(k)s have a few differences, but the primary one is when you pay taxes. At a high level, here’s what to know about how each one works:
*Withdrawals are generally tax-free on contributions and earnings if you have held the account for at least five years.
Compare Traditional vs. Roth 401(k) Contributions
There are good reasons to choose either a traditional or Roth 401(k). Let’s explore the differences between the two to help you make an informed decision.
Roth Options Growing for Other Types of Retirement Plans
Roth 401(k)s are not the only type of Roth employer-sponsored retirement plans. Some 403(b) and SIMPLE IRA plans also offer after-tax Roth contributions. 403(b) plans are designed for employees of schools and non-profit organizations. SIMPLE IRA plans are for small businesses with fewer than 100 employees. Both also offer employer contributions that remain pre-tax.
Traditional and Roth 401(k) Contribution Limits
Annual contribution limits for traditional and Roth 401(k) plans are the same. If you have both accounts and another employer-sponsored retirement plan, your contributions are subject to a combined limit set by the IRS each year. This means the total you can contribute across all plans is capped. For 2026, the maximum contribution limit for all plans is $24,500.
If you are age 50 or older, you may be able to make a “catch-up” contribution, the amount of which is determined by your age for 2026 as set by Secure Act 2.0.
Age 50 to 59, and 64 and up is $8,000 in 2026.
Ages 60 to 63 is $11,250 in 2026.
How Are Roth 401(k)s Different from Roth IRAs?
Many people expect Roth 401(k)s and Roth IRAs to have the same features. It’s true they are similar in some ways, but not every way. Both offer tax-free withdrawals if the account is at least five years old and you are at least age 59½. In addition, neither account has a required minimum distribution rule at age 73.
Differences between the two accounts include:
Roth 401(k)s do not allow penalty-free withdrawals for special purposes, such as a first-time home purchase, as Roth IRAs do.
Roth 401(k)s have higher contribution and catch-up limits than Roth IRAs.
Roth 401(k)s do not limit or restrict contributions if your adjusted gross income is above a certain amount, like a Roth IRA does.
If you leave your employer, you may be able to roll over your savings² from a Roth 401(k) to a Roth IRA or a 401(k) plan that accepts Roth contributions. This allows you to keep the money in a tax-advantaged account.
Decision Points for Choosing a Traditional or Roth 401(k)
Deciding between a traditional and a Roth 401(k) depends on a few factors. Both options offer tax advantages, but not the same ones. Other factors include your age and salary. This decision is not about which type of 401(k) is better; it’s about which best fits your needs.
Should I Choose a Traditional or Roth 401(k)?
For most, the answer depends on your tax situation. If you expect your tax rate to be higher in retirement, Roth after-tax contributions may be a better fit because they allow tax-free withdrawals in retirement.
If you expect your taxes to be lower in retirement than they are now, you may want to stick with traditional 401(k) pre-tax contributions.
Here are other situations that may impact your choice.
Is a Roth 401(k) Better for Younger Workers?
Roth 401(k)s may be a good choice for younger workers because they are typically not at their peak salary yet, and their taxes are likely to be higher later than they are now. It’s also why older workers at their peak salary levels may choose traditional 401(k) contributions, since they expect their taxes to be lower in retirement.
Is a Traditional 401(k) Better for High-Income Earners?
A traditional 401(k) may be better for high earners because it offers immediate tax deductions when your tax rate is likely at its highest: 32%, 35%, or 37%. Every contribution to a traditional 401(k) reduces your current income tax. It can be more efficient to pay taxes in retirement, when most people’s tax rates are lower.
One caveat: Are you expecting large pension payments or higher Social Security benefits? You may want to opt for a Roth 401(k) now to reduce your tax burden in retirement.
Can I Contribute to Both a Traditional 401(k) and a Roth 401(K)?
Yes, if your company’s retirement plan offers both options, you can contribute to both a traditional 401(k) and a Roth 401(k). That gives you more flexibility when making withdrawals in retirement, which I encourage my clients to consider.
In my experience, many retirees only have a traditional account and end up paying a lot of taxes, especially in their early retirement years. Having both may be a good idea if you are uncertain whether taxes will be higher or lower in retirement.
Should I Talk to an Advisor About This 401(k) Decision?
You can absolutely talk to an advisor about the best option for your 401(k) or other retirement plan, as it will impact your overall retirement planning. It’s also a tax strategy decision and not just an investment one.
An advisor can help weigh in on your current tax bracket compared to your expected future tax bracket, whether you will benefit more from the tax breaks now or in the future and how this choice fits with your overall retirement plan.
Authors
Financial Consultant
Plan for Retirement With an Advisor
An advisor can help with decisions about workplace retirement plans. Our advisors offer a one-time personal consultation and ongoing advice for your planning and investing needs.
Survey Findings: Six Key Trends for 2026, Plan Sponsor Council of America (PSCA), November 2025.
If a client rolls Roth sources in these plans to a new Roth IRA, the 5-year requirement starts at rollover in order to take penalty-free withdrawals from a newly established Roth IRA.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
This information is for educational purposes only and is not intended as a personalized recommendation or fiduciary advice. There are different options available for your retirement plan investments. You should consider all options before making a decision. Our representatives can help you evaluate all of your distribution options.
IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.
Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
SIMPLE IRA:
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
If withdrawals are made within the first two years of participation in the SIMPLE IRA, the penalty increases to 25%.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.