Traditional vs. Roth 401(k) – Optimizing Retirement Account Contributions

Traditional or Roth




The 401(k) is one of the most frequently offered and utilized employee benefits. You’ve no doubt heard the term and have contributed or thought about contributing to your employer sponsored 401(k) plan. There has been a shift from defined benefit plans and pensions offered by employers, to defined contribution plans (such as 401(k)s) that  place the responsibility of financial and retirement planning largely on today’s employees (you!). Strategically approaching your contribution strategy can help you optimize the benefits inherent within each type of account.

It is not uncommon for employers to offer the option of contributing to a Traditional (Pre-Tax) and Roth 401(k) in order to assist you in your quest to save and invest for retirement. . Choosing between making Pre-Tax or Roth (after-tax) contributions is dependent on factors such as:


  • Your current and future income levels
  • Your current tax bracket and filing status 
  • Long term savings goals
  • Retirement lifestyle goals


You are not limited to one of the two options and being strategic about when you contribute to a Roth and Traditional, as well as when a mix of the two, is appropriate. Understanding the characteristics, benefits and potential disadvantages of the respective options will help you determine which type or mix of contributions you would like to make now, and how future changes in income should impact your contribution strategy. At its most basic level, you should be looking to pay income taxes on contributions or distributions when your personal tax rates are at their lowest levels.


Traditional (Pre-Tax) 401(k)

Contributions to a traditional 401(k) are “above-the-line” deductions and reduce your adjustable gross income for the year, which can impact a number of tax credits and deductions that you are eligible for. You are deferring tax payments now, which will subsequently be paid in the future when the contributions are withdrawn. For example, if you made $175,000 in 2021 and contributed the pre-tax maximum amount of $19,500, your wages reported on your W-2 and on your Form 1040 would be $155,500 (ignoring a multitude of other factors). 

In general, it makes sense to consider Traditional 401(k) contributions when your marginal tax bracket is 24% or higher . The core features of Traditional 401(k)’s include:


  • Tax deferred growth of earnings 
  • Income tax upon distribution
  • A 10% penalty in addition to the income tax if withdrawn before age 59 ½ (there are some exceptions)
  • Required Minimum Distributions (RMDs) beginning at age 72 (unless you turned 70 ½ before January 2020) which increase yearly based on the IRS distribution table


A traditional 401(k) has both advantages and disadvantages. The chart below provides an overview of some of the factors and characteristics of you should keep in mind:



Roth 401(k)

Roth 401(k) contributions are made after tax and do not lower your income for the current year. Returning to the example above, if you had selected to make the maximum contribution of $19,500 into a Roth 401(k), your income on the year would still be $175,000. In essence, you are trading the current savings for potential future savings, as withdrawals from a Roth are tax free. The core features of a Roth 401(k) include:


  • Tax free growth of earnings
  • Tax free withdrawals once you reach age 59 ½ 
  • Contributions can be withdrawn penalty free after 5 years
  • RMD’s beginning at age 72 for Roth 401(k)’s. Roth IRA’s are not subject to RMDs




Optimizing Your Contribution Strategy

The option of choosing between Traditional and Roth 401(k) contributions is secondary to saving in the first place. With that being said, opportunistically taking advantage of Roth contribution opportunities to benefit in low or lower income years, while sticking with the benefits of traditional retirement accounts during high or higher income years is prudent. The decision will have the most impact when there are significant differences between current and anticipated future tax brackets. Otherwise, the tax benefits of both will tend to be relatively similar.


Key Figures for 2022: 

Disclaimer: The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. This content is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Hereford Financial disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.

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