Both account types can help you save through an employer
retirement plan. The biggest difference is when your
contributions are taxed and how qualified withdrawals are
treated.
Roth and traditional elective deferrals share the applicable
employee 401(k) elective-deferral limit. Splitting contributions
between the two does not create a separate Roth limit.
These simplified examples demonstrate the timing of taxation.
They are not forecasts of investment returns or future tax rates.
Roth 401(k)
Taxes generally come first
A Roth contribution is included in gross income in the year
it is contributed.
✓Contribution is after tax.
✓Current taxable income generally does not receive the pre-tax deduction.
✓Qualified distributions are generally tax-free.
Traditional 401(k)
Taxes generally come later
A traditional pre-tax elective deferral generally receives
its tax advantage when the contribution is made.
✓Contribution is generally pre-tax.
✓Current taxable income is generally reduced by the contribution.
✓Distributions are generally taxable as income.
Tax Rate Consideration
Why future tax rates matter
Roth versus traditional decisions involve the timing of taxes.
Your current tax situation, future tax situation, income,
contribution amount and retirement circumstances can all affect
the comparison.
NOW
Current tax rate
Traditional contributions can generally reduce taxable income
today, while Roth contributions are included in current income.
LATER
Future tax rate
Traditional withdrawals are generally taxable, while qualified
Roth distributions are generally excluded from gross income.
PLAN
Plan features
Your employer plan determines whether Roth contributions,
matching and other features are available.
Employer Match
What happens to the employer match?
The employer match is a separate consideration from whether
your own contribution is Roth or traditional.
Your Roth contribution
Your designated Roth elective deferral goes into the
designated Roth account.
Employer matching contribution
An employer can use Roth deferrals when calculating a match,
but the matching contribution must be allocated to another
account rather than directly to the designated Roth account.
The primary difference is tax timing. Roth 401(k) contributions
are included in gross income when made, while traditional
pre-tax elective deferrals generally receive pre-tax treatment.
Qualified Roth distributions are generally excluded from gross
income, while traditional distributions are generally taxable.
Yes. If your employer's plan offers both options, you can
generally allocate your elective deferrals between designated
Roth and traditional pre-tax contributions. The combined
contributions remain subject to the applicable elective-deferral
limit.
No. The IRS states that there is no income limit for making
designated Roth 401(k) contributions. This differs from Roth
IRA eligibility rules.
Yes. Roth and traditional elective deferrals share the
applicable employee elective-deferral limit. Choosing Roth
does not create a separate additional 401(k) contribution limit.
An employer can use designated Roth contributions when
calculating a matching contribution if the plan provides for
matching. The matching contribution must be allocated to
another account rather than directly to the designated Roth
account.
No. Roth 401(k) distributions must satisfy the requirements
for a qualified distribution to receive the generally
tax-free treatment. Nonqualified distributions can receive
different tax treatment.
Neither. Roth and traditional employee elective deferrals share
the same applicable 401(k) elective-deferral limit.
A designated Roth contribution cannot simply be recharacterized
as a traditional pre-tax contribution after it has been made.
Check your plan rules before making your contribution election.
See the difference with an interactive comparison.
Explore an illustrative Roth versus traditional 401(k)
projection using the 401k.blog comparison calculator.
Educational information:
This page provides general educational information about Roth and
traditional 401(k) plans and is not tax, legal, investment or
financial advice. Tax rules and plan provisions can change and may
vary by individual circumstances. Review your plan documents and
consult a qualified professional for advice about your situation.
401K
Ask 401KAnswers from 401k.blog
Website content only · Educational, not financial or tax advice