I regularly see people paying $8,000+ more in taxes each year than they need to, especially those earning good money or who live in high-tax states.
Do that for 30 years you can still be far behind, even after accounting for taxes in retirement.
People often choose Roth by default because it feels safe: pay the tax now and never worry again. But it’s often costing them money.
The decision between Traditional and Roth is one of only a handful of decisions that actually compound into tens or hundreds of thousands of dollars.
I write on this blog to help you all, my finance friends, deeply understand the few things that really matter. Get things like this right, and you’ll manage your money better than most CPAs and “investors”.
Today, I’ll illustrate why a Traditional 401(k) usually wins, the specific situations where the math flips, and a calculator tool to make sure you’re doing the right things in your specific financial situation.
The decision is a tax estimate
At its core, the Traditional vs. Roth 401(k) question is: will you pay higher taxes now or later?
Traditional = skip tax today, pay tax on withdrawals.
Roth = pay tax today, skip tax on gains and withdrawals.
Is today’s tax rate higher than your future rate? Traditional is better. Will your future rate be higher? Roth is better.
If you earn good money, today’s tax rate is usually higher simply because you will need less income in retirement when you aren’t still saving for retirement, commuting, and work expenses.
That’s why a Traditional 401(k) is usually better for people who are mid-to-late career years. (Roth is usually better for people just starting working.)
The rate that matters on both sides is your marginal rate, the tax on your next dollar.
When you contribute today, each Traditional dollar avoids tax at your top marginal rate. When you withdraw in the future, your withdrawals stack on top of your other taxable income, like Social Security or a pension.
You’re comparing the tax on those withdrawals to the tax you skipped today.
For example, take someone contributing $24,500 into a Roth instead of a Traditional 401(k) as a single filer earning $150,000.
They save 33% taxes today on their Traditional contributions vs. Roth. In retirement the tax on the Traditional withdrawals averages about 23%.
They save 33% going in, spend 23% coming out. Choosing a Traditional 401(k) will make this person richer by about $60,000 over 30 years.
I ran over 250 scenarios, covering single and married filers in high tax and no-tax states covering a range of incomes, assuming taxes saved on Traditional gets invested to compare apples-to-apples.
Traditional came out ahead in over 90% of them.
The other 10%, Roth came out ahead. That’s why you have to run your numbers. Here’s a calculator to do it yourself.
What about taxes going up?
A common objection I hear is: “Tax rates are at historic lows, they have to go up eventually, right?” It’s a fair point.
While the long-term trend line has moved downward, being near historic lows means we may be closer to the floor than the ceiling. Whether this trend continues to lower taxes or reverses is a question we just have to guess at.
Rising tax rates are the biggest threat to Traditional’s edge, because that’s when the tax gets paid. In the example above, rates would need to rise roughly 4 points across every federal bracket before Roth pulled ahead.
The illusion of the marshmallow test
I suspect many of us default to the Roth because of a psychological “Marshmallow Test” bias. Those of us who are making an active effort to manage our money well have also been conditioned to believe that the best financial choice is always the one that involves the most immediate sacrifice for a future reward.
We think: ‘If I just suffer through the tax bill now, I’ll be rewarded with a tax-free future.’
It feels like the disciplined, adult thing to do.
But for most high earners, this is a rare case where taking the tax savings now leaves you with a bigger pile of marshmallows in the end. Choosing Traditional means getting 5 marshmallows now, while choosing Roth means having 4 marshmallows later.
When does Roth do better?
Roth tends to catch up, and sometimes edge ahead, when:
Early Career. You’re early in your career and expect your income to grow, which means a higher rate on the dollars you’ll withdraw later in life.
Pension. You’ll have a pension, rental income or a large pre-tax balance that fills your cheap retirement brackets.
Low taxes now. Your marginal rate today is low, around 12% or less.
Career breaks. You’re in a temporary low-income year, like a sabbatical. Do Roth for that year and switch back when full income returns.
Taxes go up. You expect federal tax rates to rise significantly.
Retire to a high tax state. You work in a low-tax state and expect to retire in a high-tax one (unusual but happens - for example, retiring to Hawaii).
If none of these describe you, Traditional is often the better fit.
Roth Conversions give Traditional a big advantage
If you retire before Social Security, you’ll likely have years of low income. You can convert Traditional dollars to Roth in those years at cheap rates, which can make Traditional dramatically better than the comparison above. I explain the strategy here. This can often be enough to avoid the tax torpedo of Required Minimum Distributions (RMDs).
What you can do today
Check your current split. Open your 401(k) portal, find the contribution election page, and screenshot your Traditional and Roth percentages.
Run the updated calculator. Download it here, then enter your income, states, contribution and retirement spending. Fill in the other-income box honestly, because it moves the answer most.
Decide on whether to switch. If Traditional wins clearly and your election is mostly Roth, you can consider changing it. Go to your 401(k) portal and update your elections. It should take about 60 seconds. If it says close call, either choice is reasonable.
You may now be wondering if you should split across both Traditional and Roth? Many savvy investor do just that. I have an upcoming article on this exact question.
Is your 401(k) big enough to cause an RMD problem yet?
“Traditional retirement accounts are better than Roth the more you earn.” I’ve given that advice myself, and as a general rule, it still holds. You get the deduction now, at your highest marginal rate, and pay the tax later, in retirement, when your rate is usually lower.
Disclaimer: This is for informational and educational purposes only and does not constitute financial, legal, or tax advice. Consult a professional before making major financial decisions.
The marginal vs effective rate distinction is the single most misunderstood concept in retirement planning. Most people assume tax rates will go up, but even if they stay the same, the math heavily favors Traditional for high earners today. The calculator in your article should be required reading.
Both serve their purposes and both should be utilized at different points along the wealth creation process.