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My company matches my 401(k) contributions, 4% to my 5%, so I'm contributing at least 5%. So I ran some numbers.

If I switch from traditional contributions of 5% to ROTH contributions of 5%, my take-home pay decreases by $50. I'm in the 22% tax bracket, and married, filing jointly. I'm at the very low end of the bracket, so I'm not likely to jump up to the 24% even when my spouse also gets a job. To reduce my take-home pay by an equal $50 with a Traditional contribution, I need to put approximately 6.5% per pay period into my Traditional 401(k) account.

I'm not sure how to do the calculation on growth over time, or approximate future tax costs, etc. I don't know which one is the better option. Either way I take home $50 less now, but with Traditional I contribute more, and with ROTH, I pay less taxes in the future.

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To first order, assuming your tax rate in retirement will be the same as now, you would be indifferent between traditional and Roth -- an equal reduction in current take-home pay will lead to equal after-tax retirement income. Note that the employer match always goes into a traditional account, so that does not affect the decision (since you are maxing out the match).

The Roth 401(k) can be advantageous if you expect your tax rate to be higher in the future, if you are maxing out the contribution limit (Roth effectively allows you to contribute more), or if you want to avoid required minimum distributions in retirement via an IRA rollover. More discussion can be found here and here.

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  • So if I'm following you correctly, in my situation, where I don't expect to go up or down a tax bracket in retirement, a 6.5% contribution in Traditional would be roughly equivalent to a 5% contribution in ROTH, and neither would be much better than the other. Am I understanding correctly? Still don't follow how "Roth effectively allows you to contribute more". Unfortunately, I'm in neither a low nor a high tax bracket, so I've no idea what to really expect.
    – Christ Schlacta
    Aug 5, 2020 at 1:40
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    @ChristSchlacta Correct -- but keep in mind even if you don't "go up or down a tax bracket", the bracket rates themselves can change (and are now historically low). How Roth effectively allows you to contribute more: To max out your 401(k), you'd contribute $19.5k to a Roth. We said there's an equivalence and you could do as well with traditional if you contribute about $25k... but that's not allowed (the dollar limit is also $19.5k for traditional). After-tax dollars are worth more than pre-tax dollars, so Roth wins if you're trying to shovel in as much tax-advantaged savings as possible.
    – nanoman
    Aug 5, 2020 at 3:25
  • Thank you. That really does clarify things quite a bit, especially the $19.5K vs $25K example.
    – Christ Schlacta
    Aug 5, 2020 at 22:05
  • There’s nothing like being in the 22% bracket, but when you add $10000 to income on the tax software seeing that the tax jumped over 3500. Phaseout from the college credit, medical deduction (which is based on 7.5% of magi) and the Covid tax credit. I’d err in favor of Roth, given my experience.
    – JTP - Apologise to Monica ♦
    Aug 6, 2020 at 0:36
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There is one variable that is often overlooked in the Traditional vs Roth calculation:

It's possible your state income tax will be lower in retirement.

For example, in Illinois and Mississippi, there is a state income tax, but not on retirement income. Or, when you retire you may move to a state without income tax. If you pay income tax today, but may not in the future, then this may tip the scale in favor of Traditional since you avoid the state income tax now and also don't pay it when you retire.

One exception to this would be if you could afford to max out your Roth 401k. In that case you may still be better off with the Roth, despite the potential state income tax savings on the traditional, since you can effectively contribute so much more.

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Keep in mind, matching funds go into the traditional side of the 401(k).

I am nearly 58, retired at 50.

Roth came a bit too late for us. We were already in a high bracket, and stuck with the traditional 401(k).

In the end, you can’t know what the tax rates will be in retirement. And the goal of a mix of the two types, 60/40 if you favor one over the other, is fine.

It’s interesting to find that there are phantom tax brackets, other than what you expect. For example, income from $160K-$180K will phase out the $2500 tax credit for your college kid’s tuition. That creates an effective 12.5% extra tax in that range. There are multiple examples of the phantom tax right up to when you start collecting social security.

TLDR - aim for a mix of the 2 account types.

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