Traditional vs. Roth 401k

When it comes to retirement plans, it can be very difficult to understand whether a traditional vs. Roth 401k is a better option for your employees due to the inherent complexities of our tax system. Consequently, it is crucial that you understand these different retirement plan options so that your employees can make decisions that best suit their financial situation.

Here we will discuss the pros and cons of traditional vs. Roth 401ks, including a detailed explanation of the tax implications of each option.

What is a Roth 401K?

This question requires an understanding that both traditional and Roth 401ks refer to employee contributions to employer-sponsored retirement plans. A 401k account works as employees contribute to the account and the employers will often match their employees contribution.

A Roth 401k account is funded using after-tax dollars, which means that income tax is paid immediately from an employee’s earnings before being contributed to their retirement account. A Roth 401k also has contribution limits that are based on their age and adjust annually for inflation. As of 2025, the contribution limit for those under 50 is $23,500, while the limit for those 50 and older is $31,000.

This contribution limit applies to the aggregate of Roth and traditional 401k contributions, so participants cannot contribute $23,500 and $31,000 separately in their Roth and traditional accounts.

What is a Traditional 401K?

Unlike a Roth 401k, participants fund a traditional 401k with pre-tax contributions, which reduce their current taxable income. They will pay taxes at their applicable income tax rate upon withdrawal. Like a traditional 401k, earnings accumulate tax-free, so both are good options for long-term growth.

Depending on their situation, employees could split their contributions between a traditional and a Roth 401k as long as their total contributions do not exceed the limit. This practice is a form of tax diversification.

Roth IRA Vs. 401K

Another account to consider when it comes to a retirement plan is a Roth IRA vs. 401k account. A Roth IRA is a type of individual retirement account that allows employees to pay taxes on the money they are contributing. The benefit of doing this is that all of their future withdrawals will be tax and penalty-free if their account has been open for at least five years and they are 59 1/2 years old or older.

When comparing a Roth IRA vs. 401k account, a Roth IRA is considered best for those who expect their marginal tax rate to be higher in retirement. The contribution limit for a Roth IRA in 2025 is set at $7000, but those 50 and older can make catch-up contributions of $1000.

Pre-Tax Vs. Roth 401K Accounts

Now that you understand the difference between a traditional vs. Roth 401k and a Roth IRA vs. 401k account, we need to discuss the pros and cons. Although traditional and Roth accounts are quite beneficial, there may be one specific type of retirement plan that is more suitable for your situation.

The main differences employers need to consider are the tax implications for these types of 401k accounts. Roth 401k contributions are made after-tax, and traditional 401k contributions are made pre-tax, which impacts how an employee's overall tax contributions are handled.

Which is the Best Option For You?

At Paul D. Sippil & Associates, we recommend that younger individuals allocate at least a portion of their contributions to Roth 401k if they expect their income to rise over time. This will allow them to pay taxes at a lower rate and have tax-free withdrawals later on when their tax rate becomes higher. On the other hand, a Roth 401k account is also best for older individuals who plan on continuing working full or part-time during retirement, as their tax rate may not decrease much or at all. And a Roth 401k becomes even more valuable if tax rates are expected to increase.

For individuals who are good at handling their money and have high-interest-rate debt, a traditional 401k may be preferable. This option allows employees to take advantage of tax savings while also allowing them to direct much of their income toward debt repayment. A traditional 401k is also a good option for those nearing retirement who do not expect to continue working since they will likely pay a lower tax rate upon withdrawal.

If employees are concerned about your future tax payments and potential tax increases, a Roth conversion is one option if your plan allows for it. However, they will have to pay the taxes out of pocket from a separate account. The taxes may be mitigated if they are able to convert at a market bottom, but it can be hard to time a market bottom. An easier solution is simply to allocate future contributions to the Roth 401k

Understand Your Options With Paul D. Sippil & Associates 401K Consultations

Whether an employee is just beginning their career or is nearing retirement age, they need to understand what their options are when it comes to retirement plans. There is a lot of confusion about traditional vs. Roth 401ks, but there are some differences that should be considered. Depending on an employee’s career, financial situation, or future financial goals, one plan may be better than the other.

At Paul D. Sippil & Associates, we provide 401k consultations that can help you better understand your retirement plan options. This is essential for all employers, especially those who do not completely understand what their 401k plan entails and how it will impact their employees.
Contact us today at Paul D. Sippil & Associates to better understandyour 401k options with a thorough 401k consultation.

Traditional vs Roth 401(k)