I am trying to understand the differences and benefits of putting money in Traditional 401k over Roth 401k.

If I have to still pay tax while withdrawing money from my Traditional (pre tax) 401K after retirement, what are its advantages over Roth? It's not like I am avoiding paying taxes at all or even reducing my taxes (?).

3 Answers 3


As you already mentioned, a traditional 401K is tax-deferred, so you don't pay any taxes on the money in the account until you retire. A Roth 401K has already been taxed, so you don't pay taxes on withdrawal (assuming you withdrawal after 59 1/2 years of age)

The Roth 401K is advantageous if you believe you'll be in a higher tax bracket than you are currently. This applies more so if you're out of school and your income is relatively small, but you think in 10-15 years you'll be making enough money to fall into the next tax bracket. In essence, you can use a Roth 401K as a way of diversifying your retirement money across different tax structures.




  • Thanks for the answer, which tax bracket would I fall under when I retire? Is the total amount in my retirement fund going to drive that or is it the last tax bracket when I retired? Apr 23, 2015 at 18:06
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    Your tax bracket in retirement depends on how much income you have every year. Since you're retired you won't have any employment income, but any 401(k) withdrawals will be considered normal income. So if you take $40,000 out of your 401(k) one year, you will be taxed in the same bracket as if you made $40,000 of earned income (assuming you don't have any other income as well). And if you take $60,000 out one year, you'd be taxed accordingly, etc.
    – JuiceBox
    Apr 23, 2015 at 18:10
  • @JuiceBox: Yes. This comes as rather a nasty surprise to those of us who started saving for retirement back when they first implemented 401k/IRA plans, but have since discovered that we don't want to retire.
    – jamesqf
    Apr 23, 2015 at 19:00
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    "The Roth 401K is advantageous if you believe you'll be in a higher tax bracket than you are currently." - ROTH 401(k) is advantageous if you believe you'd have higher tax rate (taxes / total income) then your current marginal tax rate (tax on next dollar you earn) so 401(k) might be better even if your marginal rate would be higher (see JoeTaxpayer answer - with 401(k) you fill from bottom while taking from top).
    – User
    Apr 24, 2015 at 2:15
  • @User: "with 401(k) you fill from bottom while taking from top" In both cases it's from the top. It's just a question of how much from the top.
    – user102008
    Apr 24, 2015 at 22:37

Age. Current marginal rate. Total saved so far. Current rate of savings. Joint or single filer. These are among the variables that go into making this decision. Without this, my answer is a general response.

In general, you have one marginal rate today. (Unless you happened to be straddling a bracket limit).

In retirement, you have your marginal rate, of course, but also every bracket up to that level. It can make sense to save today pretax to avoid 25%, knowing this money will be withdrawn at an average 10 % or so in retirement.

Edit to clarify to the one who offers comment below to the contrary.

The 2015 taxtable for single filer:

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A single person has a combined $10,300 standard deduction and exemption. This means that if he has no other income in retirement, a withdrawal of $47,750 results in a tax bill of $5156. This is an average 10.8% on that withdrawal. It also means that one can save nearly $1.2M before hitting the 25% bracket in retirement. With the numbers I offered, the next $1 is taxed at 25%. In general, if a new worker starts by using Roth, and goes to traditional to avoid slipping into the 25% bracket, they will have a nice mix of pre and post tax money.

In the end, it's not a long term binary choice. Each year, you can decide which flavor or mix of flavors to use. You can convert from traditional to Roth each year to "top off" the 15% bracket, so you retirement withdrawals never push you into the 25% bracket.

Note - the math above tragically ignores The Phantom Tax Rate Zone caused by the taxation of Social Security benefits. For a young person, I don't know that I'd advise counting on this benefit, but if you believe in fairy dust, unicorns, and the like, you should be aware of how the government currently plans to tax you. This situation leans strongly toward the Roth. Until congress decides to use Roth withdrawals as a trigger to tax or reduce your benefits, in which case, just using a taxable account will be all that's left.

2 years ago, I wrote a blog post The 15% solution which walks the reader through the process of optimizing their savings from a tax standpoint. The choice of investments is another matter, this simply addresses the pre-tax post-tax issue.

  • "In retirement, you have your marginal rate, of course, but also every bracket up to that level." The same exact logic applies to the contribution. You are treating them differently due to your unstated assumption that the withdrawal in retirement occupies a larger portion of the income than the contribution now.
    – user102008
    Apr 24, 2015 at 22:39
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    if the money at withdrawal is at just one rate, I'd choose zero. For a couple, the first 20K has no tax. Sorry, not sure what your point is. Apr 25, 2015 at 1:42
  • I am saying that there is no difference, technically, between how the tax rate works in contribution and withdrawal.
    – user102008
    Apr 25, 2015 at 1:50
  • I disagree with you. Your scenario is certainly possible, but not the typical way it works. The couple who saves while in the 25% bracket has to start their withdrawals at zero. The first $500K gives a $20K annual withdrawal. If it comes out at the same rate, where did the income come from to set the bracket so high? Apr 25, 2015 at 2:14
  • The difference between contributing $x of deductible Traditional IRA vs. Roth IRA is that the Roth IRA case has $x more of taxable income than the Traditional IRA case. Conversely, the difference between withdrawing $x of deductible Traditional IRA vs. Roth IRA is that the Traditional IRA case has $x more of taxable income than the Roth IRA case. It is entirely symmetric. In both cases, the differences in taxes from a difference of $x of taxable income can be viewed as coming from the tax bracket(s) that make up the "top" $x of income.
    – user102008
    Apr 25, 2015 at 7:08

The advantage of a Traditional IRA is: tax deduction today. The advantage of a Roth IRA: no tax on withdrawal.

Both types are tax-deferred, and have no bearing on the question.

  • The question is about flavors of 401k plans, not IRAs. Apr 25, 2015 at 14:44
  • Similar A/B choice, but yes, I agree, one should kinda read the question and address it directly. Apr 25, 2015 at 19:42
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    ummm... yeah. good point: note to self.
    – michael
    Apr 25, 2015 at 21:25

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