US money guide

Traditional vs Roth 401(k)

Updated 3 August 2026 · 5 min read

Both are the same account with the same investments and the same limit. The only difference is when you pay tax — now or later. That single choice is worth a surprising amount of money, and the right answer depends mostly on one thing.

How each works

Traditional (pre-tax): contributions come out before income tax, so your taxable income drops today. The money grows untaxed, and you pay ordinary income tax on withdrawals in retirement.

Roth: contributions come out of after-tax pay, so no break today. But the growth and the withdrawals are entirely tax-free in retirement.

Note one thing that catches people: neither reduces FICA. Social Security and Medicare are taken on your gross wages either way.

The question that decides it

Will your tax rate be higher now, or in retirement?

Higher now (peak earning years, high-tax state) → traditional usually wins. Take the deduction at 32% and withdraw later at 22%.
Higher later (early career, low bracket, or you expect a large retirement income) → Roth usually wins. Pay 12% now to never pay again.

A young person in the 12% bracket choosing traditional is often making a quietly expensive mistake. So is a peak-earning 45-year-old in California choosing Roth.

The state angle nobody mentions: if you're contributing in California or New York but plan to retire in Florida or Texas, traditional lets you take the deduction against a high state tax rate and withdraw where there's none. That's a real, sizeable arbitrage.

See what a contribution costs you →Compare take-home at different contribution levels, with your state's tax.

Why "just do some of each" is reasonable

Nobody knows what tax rates will be in thirty years. Splitting contributions gives you both tax-free and taxable money in retirement, which lets you manage your bracket year by year — drawing from the Roth in years you'd otherwise be pushed higher.

The thing that matters more than either

The traditional-versus-Roth debate is genuinely worth a few percent. Getting the full employer match, contributing consistently, and starting early are worth vastly more. Someone contributing 15% into the "wrong" account will comfortably out-retire someone contributing 3% into the right one.

Quick answers

Is a Roth or traditional 401(k) better?

Traditional saves you tax now at your current rate; Roth pays tax now so withdrawals are tax-free later. If you expect a lower tax rate in retirement, traditional usually wins. If you expect a higher one — or you are early career on a low rate — Roth often wins.

How much can I contribute to a 401(k) in 2026?

The employee deferral limit is $24,500 in 2026, with additional catch-up contributions allowed from age 50.

Should I contribute enough to get the full employer match?

Yes, before anything else. An employer match is an immediate, guaranteed return that no investment can beat.

Written in plain English by mytakehome.money. General information, not financial advice — check anything important at gov.uk or with a qualified adviser.