Why the Traditional 401k beats Roth (if you earn well.)
Roth could be costing you $85,000+. (Calculator included)
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 (e.g., NY, CA).
Do that for 30 years, even after accounting for taxes in retirement, you’re still $85,000+ behind.
That’s enough to retire a year earlier, take a career break, or go on very nice vacations.
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 to pick a Traditional 401(k), 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. Future rate higher? Roth is better.
If you earn good money, today’s tax rate is almost always higher. That’s why a Traditional 401(k) wins.
Why? There’s something not obvious going on with the tax rates. It’s not just the percentage rate that’s different, but also how the tax rates affect them that are different. Let me explain.
It’s a mistake to compare your marginal tax rate now to your marginal tax rate in retirement.
You need to compare your marginal tax rate on the contributions to your effective tax rate on the distributions in retirement to determine which is better.
As I’m sure you know, the marginal tax rate is your top tax bracket.
While the effective rate is essentially the average of your tax brackets. You take your total taxes and divide them by your total income.
This means that the effective rate is always lower than your marginal rate because taxes are progressive.
Every dollar you put into a Roth today is taxed at the highest marginal rate.
Yet every dollar you withdraw from a Traditional is taxed at the lower effective rate (the average).
Your marginal rate now and your average effective rate in retirement are not the same number.
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 or reverses is a question no one can answer with certainty.
All of this can be very hard to estimate. I can’t do it in my head. That’s when tools are needed. So I’m giving you a comprehensive calculator in this article that includes testing the impact of future tax rate increases.
An example: a $150k earner in a high tax state
Here’s what the tax rate bet actually looks like for a single filer earning $150,000 in a high-tax state like California in 2026:
Roth Contributions: Rate going in (marginal): 24% federal + 9.3% California = 33.3%.
Every pre-tax dollar you steer into a Traditional 401(k) saves 33.3 cents right now.
Vs. Traditional Distributions: Rate coming out (effective): For $100,000 of annual retirement spending pulled from a 401(k), the blended tax bill is roughly $18,500 or a 18.5% effective tax rate, combined federal and state.
You are paying 33.3% going in and 18.5% coming out. That’s 18% of tax savings on every dollar you contribute.
This example shows how Traditional 401(k) contributions save you money by skipping the highest marginal tax rate and paying tax at the lower effective rate.
If you want to see how this plays out in your specific numbers, I built a Traditional vs Roth 401(k) Calculator tool you can use. Put in your income, contribution amount, and retirement spending target, and it shows the lifetime tax difference. It takes about three minutes.
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 high earners, this is a rare case where taking the tax savings now actually leaves you with a much bigger pile of marshmallows in the end.
Choosing Traditional means getting 5 marshmallows now, while choosing Roth means having 4 marshmallows later.
When Roth actually wins
There’s nothing wrong with Roth 401(k). It’s useful in some cases. It’s just the wrong default for someone earning good money. Here are the situations where it’s genuinely the right call:
Your income and marginal tax rate are low. That typically means a single income under about $75,000 and in a low-tax state. At that rate, the tax savings against a retirement effective rate of 12-15% are small or negative. Roth’s is worth more than a tiny potential benefit.
You’re early in your career, and you expect your income to grow significantly. That’s because you’ll likely have a more expensive lifestyle in retirement than now, which will need to be funded by withdrawals from your 401(k). Larger withdrawals = higher effective tax rate.
You’ve had a lower income this year than usual, such as because of a sabbatical or career break. Your marginal rate temporarily drops. Do Roth for the rest of that year and switch back to Traditional when full income returns.
You’ll have $5M+ in pre-tax accounts by retirement. Required minimum distributions (RMDs) can push withdrawals into higher brackets than you ever saw while working. This can be a real problem for high earners and serious investors. But there are also ways to solve this later through Roth conversions in low-income years after you retire and before required minimum distributions kick in at 75.
You’re working in a low-tax state and expect to retire in a high-tax state (Rare). This favors Roth, but no one does this. Most people do the opposite and retire to Florida, where there are no state taxes, which favors Traditional.
If none of these describe you, you’re a better fit for Traditional.
Recommendations
Open your 401(k) portal. Find the contribution election page. Screenshot your current split between Traditional and Roth.
Then use the tools. Download the Traditional vs. Roth 401(k) calculator and spend five minutes on it. Put in your income, your state, your contribution amount, and what you think you’ll spend in retirement. It will tell you exactly how much you’ll pay in lifetime taxes under each scenario, and which one wins by how much.
If Traditional wins for your situation and your current election is mostly Roth, change it. The 401(k) election form takes the same 60 seconds either way. It’s the highest hourly rate you’ll ever earn for a minute of work.