Skip to content
English
SMARTMap Homepage
  • There are no suggestions because the search field is empty.

What is the difference between a traditional 401(k) and a Roth 401(k)?

The main difference between a Traditional 401(k) and a Roth 401(k) is when your contributions are taxed.

Traditional 401(k)

  • Contributions are made with pre-tax dollars, which can lower your taxable income today.
  • Taxes are paid later, when you withdraw money in retirement.
  • Withdrawals in retirement are generally taxed as ordinary income.

Roth 401(k)

  • Contributions are made with after-tax dollars, so there is no tax deduction today.
  • Qualified withdrawals of both contributions and earnings are tax-free if:
    • You are at least age 59½, and
    • At least five years have passed since your first Roth 401(k) contribution.

Contributing to both

If your plan allows, you may contribute to both a Traditional 401(k) and a Roth 401(k) at the same time. The annual IRS contribution limit applies to the combined total of your Traditional and Roth 401(k) contributions.

Employer contributions

  • Employer matching or profit-sharing contributions are always made on a pre-tax basis, even if you contribute to a Roth 401(k).
  • Employer contributions do not affect whether your own contributions are Traditional or Roth.

Required Minimum Distributions (RMDs)

  • Traditional 401(k) balances are subject to required minimum distributions in retirement.
  • Roth 401(k) balances are also subject to RMDs; however, Roth 401(k) funds may be rolled into a Roth IRA after leaving employment to avoid future RMDs.

Roth 401(k) vs. Roth IRA

A Roth 401(k) is offered through an employer’s retirement plan and is different from a Roth IRA, which you open on your own.

  • Roth IRAs have income limits that may restrict who can contribute.
  • Eligible participants may contribute to a Roth 401(k) regardless of income level, if the plan offers it.

Choosing between Traditional and Roth

Deciding which option is right for you depends on your individual situation, including your current tax rate and expectations for retirement. Some participants prefer the upfront tax savings of a Traditional 401(k), while others value the potential for tax-free income in retirement with a Roth 401(k).

Participants may generally change their contribution elections at any time, subject to plan rules.