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Education Center » Roth or traditional 401(k): Which is right for you?

Roth or traditional 401(k): Which is right for you?


Your workplace retirement plan may let you choose between making traditional and Roth 401(k) contributions. Understanding the difference between the two might help you decide which 401(k) option is better aligned with your financial situation.

If you are eligible for or currently enrolled in your company’s 401(k) plan, you are probably familiar with many of the decisions associated with managing your plan account, such as choosing a contribution rate, selecting from the plan’s investment menu and designating a beneficiary. But you may not be familiar with Roth 401(k) options and how they differ from traditional 401(k) options.

More than eight out of 10 plans offer a Roth 401(k) contribution option, but only 29% of employees with this option use it.1 The difference largely has to do with taxes. Once you consider how your investments will be taxed — which differs for both contributions now and distributions later on — you can decide which option is right for you.

These frequently asked questions and answers address some of the information you should consider in making your decision. However, we strongly suggest that you discuss your personal situation with a financial professional before taking any action.

Q: How are contributions treated for tax purposes?

A: Traditional 401(k) contributions are made with pre-tax dollars, meaning the money comes out of your paycheck before income tax is applied. This amounts to an immediate tax break for saving for retirement, as you will defer the payment of income tax until you withdraw your pre-tax contributions and any earnings.

Roth 401(k) contributions, by contrast, are funded with after-tax dollars: Income taxes are deducted from your paycheck; then your contributions are deducted. In effect, you will not be able to contribute as much, dollar-for-dollar, as with traditional 401(k) contributions if you want to keep your take-home pay the same.

Q: How are withdrawals of these two contribution types taxed?

A: With traditional 401(k) contributions, you’ll pay income tax on your withdrawals. In other words, you’ll eventually be taxed on any money you contribute and on any investment earnings in the plan.

On the other hand, qualified withdrawals from Roth 401(k) contributions are tax-free. This means you won’t be taxed on any potential investment growth in the plan. Keep reading to learn when you may take qualified withdrawals from the plan. (You will, however, pay federal — and possibly state — income tax on withdrawals of company matching contributions and/or profit-sharing contributions and their earnings because company contributions are always contributed on a pre-tax basis.)

Q: How can I determine which is right for me?

A: It really depends on your personal circumstances. Many people assume that they’ll have less taxable income in retirement and that they will be in a lower tax bracket. If that’s the case for you, traditional 401(k) contributions could be a good choice: The tax break you get on your contributions today could be worth more than the savings you might gain from tax-free withdrawals from a Roth 401(k) account.

That said, it’s possible that you’ll be in a higher tax bracket, or that tax rates may rise between now and then. In those scenarios, making Roth 401(k) contributions may help minimize the overall federal income tax you pay on your retirement savings.

Q: Who can contribute?

A: If an employer-sponsored retirement plan has a traditional 401(k) and a Roth 401(k) contribution feature, participants would be eligible to make either type of contribution, or both. If you make both traditional and Roth 401(k) contributions, your combined contributions can’t exceed the limit that would apply to either type of contribution separately. Review the current annual contribution limits to help determine how much you can contribute — including details about catch-up contributions.

Q: Are Roth 401(k) contributions eligible for an employer match?

A: Yes. If an employer offers a match on traditional 401(k) contributions, a Roth 401(k) contribution would be eligible as well. That said, you’ll have to contribute a greater percentage of your paycheck if you are making Roth contributions than if you were making traditional 401(k) contributions to receive the same employer matching contribution.

The reason: The match is based on the dollar amount you contribute. Traditional 401(k) contributions come out of pre-tax income, whereas Roth contributions come out of after-tax income, which is smaller. As a result, contributing a set percentage results in larger traditional contributions than Roth 401(k) contributions, triggering a larger match. The following table provides a hypothetical illustration.

How do deferral contributions affect take-home pay? It depends on the contribution type.

Say an employer offers matching contributions equal to 50% of the first 6% of eligible compensation that the employee defers. Assuming an employee has pre-tax eligible compensation of $50,000, the employee would have to contribute $3,000 of such compensation (6% of $50,000) to receive the maximum match of $1,500 (3% of the eligible compensation). The example below illustrates the difference in the employee’s take-home pay if traditional or Roth contributions are elected.


If using Roth 401(k) contributions

If using traditional 401(k) contributions

Pre-tax compensation



Traditional 401(k) contributions


Taxable income



Federal income tax liability



After-tax compensation



Roth 401(k) contributions


Take-home pay



Difference of $660 in take-home pay

The above example demonstrates that an employee will be left with a lower amount of take-home pay by deferring Roth 401(k) contributions at a level necessary to maximize the employer matching contributions. An employee should ensure that the impact on take-home pay is taken into consideration when determining what type of deferral to make to a 401(k) plan. You should talk to your tax advisor before making any financial decisions.

This hypothetical illustration assumes the taxpayer’s total gross income for the year is $50,000 and their filing status is single. This example also assumes the taxpayer is in the 22% federal income tax bracket and their effective tax rate, without taking pre-tax 401(k) contributions into account, is 13.23%. The example does not take into account deductions, exemptions or other adjustments to taxable income. The example also does not take into account FICA withholding or state and local income tax.

Q: When can I take withdrawals from a Roth 401(k) account?

A: You (or your estate) can take qualified withdrawals if (i) five years have passed since the first day of the year in which you made your first Roth contribution and (ii) you have reached age 59½ or become disabled. (Your estate can take qualified withdrawals after you’re deceased, as long as you reached the five-year holding period.) If you take non-qualified withdrawals, you’ll have to pay regular income taxes plus a 10% additional federal tax on any earnings, unless an exception applies. (You should consult your tax advisor before making any financial decisions.)

Note that company matching contributions are made on a pre-tax basis, and these contributions (plus any earnings) will be subject to federal (and possibly state) income tax upon withdrawal.

Q: Do both contribution types require minimum distributions (RMDs)?

A: Yes. With both types of 401(k) contributions, you generally must begin taking withdrawals as of your “required beginning date.”2 However, you can roll a Roth 401(k) account balance into a Roth IRA, which is not subject to the RMD rules during your lifetime.3

Q: What about rollovers?

A: When you retire or leave your job, you have choices for what to do with your 401(k) or other types of plan-sponsored accounts.

If you have a traditional 401(k) account, depending on your financial circumstances, needs and goals, as well as plan design, you may be allowed to leave the balance where it is; roll it over into a traditional IRA or into a 401(k) account under your new employer’s plan (as long as it accepts rollovers) or another qualified employer-sponsored plan; take a distribution; or convert it to a Roth IRA. If you were to take a distribution or convert it to a Roth IRA, you would owe taxes on the transaction.

Likewise, if you have a Roth 401(k), you can leave the balance where it is or roll it over into a Roth IRA, another Roth 401(k) or a Roth 403(b) account.

Each choice may offer different investments and services, fees and expenses, withdrawal options, required minimum distributions and tax treatment (particularly with reference to employer stock), as well as provide different protection from creditors and legal judgments. These are complex choices and should be considered with care.

Q: May loans and hardship withdrawals be taken from a Roth account balance if a plan allows them to be taken from a traditional 401(k) account balance?

A: Yes. As long as your plan allows it, both traditional 401(k) and Roth 401(k) account balances are available for 401(k) loans and hardship withdrawals.

Selecting the right contribution type for you can help you make the most of the money you set aside. That said, choosing the right contribution type isn’t nearly as important as how much you contribute and when you contribute it — so, whether you elect traditional or Roth 401(k) contributions, make sure to contribute as much as you can, as early as possible.

Learn more and take action

  • Looking for more information on Roth 401(k) contributions? View this brochure.
  • If your 401(k) plan is through Merrill and offers a Roth option, use the Roth 401(k) Comparison Calculator to see how changes to contribution type and rate, retirement age and other variables might affect your balances. To access it, log in to Benefits OnLine®, select your plan name, and go to the Contribution Rates page.


Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

For traditional 401(k)s: For pre-tax contributions, regardless of whether other contribution types are available, if you withdraw your pre-tax contributions and any associated earnings, taxes will be due upon withdrawal; you may also be subject to a 10% additional tax if you take a withdrawal before age 59½, unless an exception applies. For after-tax contributions, taxes will not be due on traditional after-tax contributions, but taxes will be due on any earnings; you may also be subject to a 10% additional tax if you take a withdrawal of traditional after-tax earnings before age 59½, unless an exception applies.

For Roth 401(k)s: Any earnings on Roth 401(k) contributions can generally be withdrawn tax-free if you meet the two requirements for a “qualified distribution”: 1) At least five years must have elapsed from the first day of the year of your initial contribution, and 2) you must have reached age 59½ or become disabled or deceased. If you take a non-qualified withdrawal of your Roth 401(k) contributions, any Roth 401(k) investment returns are subject to regular income taxes, plus a possible 10% additional tax if withdrawn before age 59½, unless an exception applies. State income tax laws vary; consult a tax professional to determine how your state treats Roth 401(k) distributions.

For matching contributions for both traditional and Roth 401(k) accounts: Regardless of the contribution type you choose, taxes on company matching contributions and any earnings on these contributions are due upon withdrawal; you may also be subject to a 10% additional tax if you take a withdrawal before age 59½, unless an exception applies.

1 Plan Sponsor Council of America, 64th Annual Survey of Profit Sharing and 401(k) Plans, December 2021.

2 The required beginning date for required minimum distributions (RMDs) is age 72. You may defer your first RMD until April 1 in the year after you turn age 72, but then you’d be required to take two distributions in that year. Failure to take all or part of an RMD results in a 50% additional tax applicable to the amount of the RMD not withdrawn. Consult your tax advisor for more information on your personal circumstances.

3 Upon rollover to a Roth IRA, the rolled-over funds are subject to the account holder’s five-year holding period applicable to the Roth IRA.