Roth vs. Traditional 401(k): The Tax Equation

The biggest question in retirement planning isn’t just what to buy, but where to hold it. The choice between Roth and Traditional accounts comes down to one thing: your current tax rate vs. your future tax rate.

Traditional 401(k)/IRA

• How it works: Contributions are made pre-tax. You get a tax deduction today.
• When you pay: You pay income tax on withdrawals in retirement.
• Best for: High earners in their peak earning years who expect to be in a lower tax bracket in retirement.

Roth 401(k)/IRA

• How it works: Contributions are made with after-tax dollars. No tax break today.
• When you pay: Never. Growth and withdrawals are 100% tax-free in retirement.
• Best for: Young professionals or those in lower tax brackets who expect their income (and tax rates) to rise in the future.

The “Unknown” Variable

We know our current tax rates. We do not know what Congress will do with tax rates 20 or 30 years from now. With national debt at historical highs, many experts argue that tax rates generally have to go up. This argument favors the Roth: lock in your taxes now while they are historically low (by 20th-century standards).

The Diversification Approach

Just like you diversify assets, you can diversify tax liabilities. Having buckets of both Taxable (Brokerage), Tax-Deferred (Traditional), and Tax-Free (Roth) money gives you control over your taxable income in retirement.