Table of Contents
Infographic: Roth vs Traditional 401k – Are You Making the Right Choice?
Roth vs Traditional 401k: Which is Better for Your First Job
Roth or Traditional 401k? Choosing the wrong option could cost you tens of thousands of dollars, and the right answer isn’t the same for everyone.
I passed the CFP® exam at 16 and have helped millions improve their finances over the last 8 years. I’ll share how both work, and which one is right for you.
Books by Easy Peasy Finance
[This is an affiliate link: at no additional cost to you, we will earn a commission if you click & make a purchase]
Roth vs Traditional 401k: The Difference in Plain Terms
With a Traditional 401k, you contribute before taxes, so your federal taxable income goes down, and you pay less tax right now.
But every dollar you pull out in retirement – which is everything you put in plus all the growth – gets taxed as regular income.
So you’re really just pushing your tax bill into the future.
A Roth 401k flips that. The money goes in after tax, so there’s no tax savings today.
But qualified withdrawals in retirement come out completely tax-free, including every dollar of growth.
If your employer provides a match, you get it whether you pick a Traditional or Roth 401k. And in most plans, your employer match goes into the Traditional, pre-tax side of your 401k, even if you make Roth contributions.
Remember, both Roth and Traditional contributions count toward the same shared limit.
So the account type only changes the timing of your taxes, not how much you’re allowed to put in.
Why Roth 401k Wins for Your First Job
The choice between the two accounts comes down to this: your tax rate today versus your tax rate in retirement.
You want to pay tax whenever the rate is lower, because that’s when it costs you less.
During your first job, a Roth 401k can be especially attractive if you’re in a low tax bracket.
Imagine you earned $60,000 at your first job, then you would be in 12% tax bracket, which is one of the lowest tax brackets you’ll ever be in, and probably lower than your tax bracket in retirement.
So contributing to a Roth 401k lets you lock in that low tax rate now.
But a Roth 401k isn’t always the winner.
When Traditional 401k Actually Makes Sense
Here’s the exception.
If you’re in a higher tax bracket now than you expect to be in during retirement, a Traditional 401k makes sense because you’ll save tax when your tax rate is high, and will be taxed at a lower rate when you withdraw.
But this is rare when you’re just starting out.
Whether you make Roth or traditional 401k contributions, you need to make the most of the employer match.
Check this out to find out how it works, get the most free money possible, and avoid a common trap that 2/3 of employees never learn about: 401k Employer Match Explained (Avoid This Trap)
