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Should I Contribute to a Traditional 401(k) or a Roth 401(k)? It's one of the most common questions I get, and the answer isn't one-size-fits-all.
It depends on where you are in your career, the bracket you're in now, and what you expect your income to be in retirement
First, Understand How the Traditional 401(k) Actually Works
When you contribute to a traditional 401(k), your contribution reduces your taxable income at your highest marginal rate. If you’re in the 22% bracket, you save 22 cents on every dollar you contribute—because that contribution reduces your income before it reaches your top bracket.
A common misconception involves the effective tax rate. The effective rate is a blended average: 0% on the first dollars, then 10%, then 12%, and so on. Because of that, some people assume their contributions are only offsetting income taxed at those lower rates.
That’s not how it works.
Even if you make contributions early in the year, they offset income that would otherwise be taxed at the highest bracket you’ll reach by year-end. The savings happen at the top, not the bottom.
How the Roth Works Differently
Roth contributions work in reverse. You pay tax upfront—at whatever bracket you’re in today—and the money has the potential to grow tax-free for the rest of your life: tax-free growth and tax-free withdrawals. Withdrawals are tax-free as long as the account has been open for 5 years and you are over the age of 59 and a half. Whether that tradeoff makes sense depends largely on where you are in your career.
The Rule of Thumb I Give My Clients
In your 20s and 30s, when income tends to be lower, and you may only be in the 10% or 12% bracket, the Roth often makes more sense. Paying a low rate today in exchange for 30, 40, or even 50 years of tax-free growth is a strong trade.
In your 50s and 60s, the calculus usually shifts. If you’re in the 32%, 35%, or 37% bracket, every dollar you put into a traditional 401(k) saves you at that rate now—and there is a good chance you’ll withdraw that money in retirement at a much lower effective rate. The upfront tax benefit is too large to pass up.
The question to ask: what rate am I paying now, and what rate do I expect to pay when I take this money out?
What This Looks Like in Retirement: A Real Example
A couple came to me with $1.5 million in a traditional IRA. When they first arrived, one of them had already started Social Security, and that was creating a problem they didn’t know they had.
Social Security interacts with other income in ways most people don’t expect. Once benefits are active, they impact your tax brackets. You reach the 22% bracket much sooner than you would otherwise, because of how Social Security income interacts with your overall income.
For 2026, a married couple both aged 65 with no Social Security income can have approximately $130,000 in gross income and remain within the 12% bracket thanks to the standard deduction and the additional deduction available to those over 65. The moment Social Security enters the picture, that window narrows significantly.
We were able to suspend her Social Security benefits (there is a process available within a certain window after starting benefits) which gave us considerably more room to draw from the IRA at a lower rate.
Their numbers: $134,000 in total income, primarily from IRA withdrawals and a small pension, with no Social Security.
Total tax bill: $12,036.
Effective tax rate: 8.96%.
Less than 9% on $134,000 of income.
(This case study is for illustrative purposes only.)
The Arbitrage
While working, this couple was saving at 22% or higher on every dollar they put into their traditional 401(k). In retirement, they’re paying less than 10% on every dollar they take out.
That’s what finance people call arbitrage. Save at 22%, withdraw at 9%. That’s a strong trade.
Which Should YOU Choose?
Every situation is different, and you truly need specific advice. In many cases we see though, Roth tends to make sense when you’re in a uniquely low tax bracket and suspect you’ll be in a higher tax bracket when the money is pulled out. Traditional 401(k) contributions likely make more sense when you’re in those peak earning years where your tax bracket is uniquely high.
This also highlights the fact that the decision doesn’t end when you retire. How you coordinate Social Security timing, IRA withdrawals, and account structure matters just as much as the choices you made while saving. If those pieces aren’t working together, there’s a good chance you’ll be paying more in taxes than you need to.
This material is intended for informational/educational purposes only and should not be construed as investment/tax advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met.
You may incur taxes if the withdrawal from your Roth 401(k) is taken less than five tax years after the year of the first Roth 401(k) contribution and if taken before you reach age 59½. A qualified distribution is one made at least five years after the tax year in which you made a designated Roth contribution to the plan and one made after you turn 59½, to a beneficiary (or your estate) after you die, or if you are disabled.
The case study presented is for illustrative purposes only and should not be construed as a recommendation. It may not be representative of your experience.