Your 401(k) enrollment form asks a question that sounds like gibberish: traditional (pre-tax) or Roth (after-tax)? You are choosing when to pay tax on this money — now or in retirement — and the fair way to compare the two takes one worked example.
The one difference: when the tax hits
Both let your investments grow with no tax along the way. The difference is timing:
- Traditional: contributions come out of your pay before income tax, lowering this year's taxable income. Every dollar you withdraw in retirement is taxed as ordinary income.
- Roth: contributions come from pay that has already been taxed. Qualified withdrawals in retirement — contributions and all the growth — are tax-free.
So the decision compresses to one comparison: the tax rate you avoid today versus the rate your withdrawals will face later. Higher today, traditional wins. Higher later, Roth wins. The same rate both times is a tie, to the dollar.
Compare them fairly: same take-home, not same contribution
The usual mistake is comparing a $3,600 Roth contribution with a $3,600 traditional one. They do not cost the same. A traditional contribution shrinks your tax bill, so for the same hit to your paycheck you can contribute more — and that extra amount is exactly what a fair comparison has to include.
Alex, from what a 401(k) is, earns $60,000, is single, and contributes 6%: $3,600 a year. His taxable income is $44,250 after the $15,750 standard deduction for 2025, inside the 12% bracket (which runs to $48,475), so every dollar he contributes traditional saves him 12 cents of tax today.
- $3,600 into a Roth 401(k) costs $3,600 of take-home.
- $4,090.91 into a traditional 401(k) also costs $3,600 of take-home, because it cuts his federal tax by 12% × $4,090.91 = $490.91.
401(k) vs IRA: same flavors, different containers
| 401(k) | IRA | |
|---|---|---|
| Who opens it | Your employer | You, at any brokerage |
| 2025 contribution limit | $23,500 | $7,000 |
| Employer match | Common | Never |
| Investment menu | The plan's list | Almost anything |
| Roth income limit for 2025 | None | Phases out between $150,000 and $165,000 of modified AGI single, $236,000 and $246,000 joint |
A common early-career order: first the 401(k) up to the full employer match (an instant 50–100% return), then a Roth IRA toward its $7,000 limit, then raise the 401(k) percentage. The IRA's wider fund menu and the Roth IRA's flexibility make it a strong second account; your first $100 shows how to open one.
Rules that come with each flavor
- Getting money out early. Withdrawals from a 401(k) or a traditional IRA before age 59½ are taxed and carry a 10% additional tax, with limited exceptions. Roth IRA contributions come back out at any time with no tax and no penalty, because Publication 590-B treats contributions as withdrawn first; Roth earnings are tax-free only once the account is five years old and you are 59½. Roth 401(k) withdrawals use the same five-year-plus-59½ test.
- Forced withdrawals. Traditional accounts require minimum distributions (RMDs) from age 73, rising to 75 for people who reach age 74 after 2032. Roth IRAs have no RMDs during your lifetime, and, under the SECURE 2.0 Act, neither do Roth 401(k)s.
- Income limits. The Roth IRA phases out at the 2025 incomes in the table above. A Roth 401(k) has no income limit at all.