Is it better to make after-tax Roth 401(k) contributions or save before-tax in a traditional 401(k)? The answer varies depending on the taxpayer. While individuals with higher incomes might not benefit as much from after-tax contributions during their working years, the decision isn’t always straightforward. Here’s when to consider pre-tax vs Roth 401(k) contributions.
What’s The Difference Between a Traditional and Roth 401(k)?
Both pre-tax and Roth accounts grow tax-deferred, but beyond that, there are several differences.
Traditional 401(k)
- Contributions reduce your regular current taxable income
- Distributions in retirement are taxable as ordinary income
- Subject to required minimum distributions (RMDs)
Roth 401(k)
- Contributions are made with after-tax dollars
- Withdrawals in retirement are tax-free (subject to age and holding period requirements)
- No required minimum distributions during the account owner’s lifetime
- Unlike contributions to a Roth IRA, there are no income limits for Roth 401(k)s
When To Use Roth 401(k) Versus A Traditional 401(k)
In most cases, individuals and households with significant taxable income will benefit more from before tax contributions. Unfortunately, we often find it is exactly those taxpayers who typically choose the Roth option instead! Here are some considerations in determining if you’re likely to benefit more from before tax or after tax (Roth) 401(k) contributions.
What Tax Bracket Are You In?
If you’re in a higher tax bracket now than you expect to be in retirement, then it generally doesn’t make sense to make Roth 401(k) contributions over pre-tax options.
For example, if your household taxable income is $505,000 in 2025, you’re in the 35% marginal tax bracket. If you were retired with taxable income of $300,000 from pre-tax retirement accounts, you’d fall into the 24% marginal tax bracket for married couples filing jointly.
So in this example, pre-paying tax at the 35% marginal tax bracket wouldn’t make much sense if you could pay tax at a much lower rate down the road.
New Tax Bill Changes The Math (Again)
One of the reasons the pre-tax versus Roth 401(k) question can be challenging for workers is that the tax code is constantly changing. As a result of the One Big Beautiful Bill passed in July, high income taxpayers have more to consider.
From 2025 to 2029, the $10,000 deduction cap on SALT (state and local) taxes is increased to $40,000, but only for taxpayers with income below $500,000. The increased deduction limits are subject to a phaseout for taxpayers with income between $500,000 and $600,000, at which point the deduction cap is limited to $10,000.
For couples under 50, the combined pre-tax 401(k) contribution limit is $47,000. Those 50 and older, thanks to the catch-up contribution, the combined limit is $62,000. That’s a lot of income to shelter!
This will change again next year. Under the Secure Act 2.0, catch-up contributions for workers over 50 must be after-tax Roth starting next year if those individuals are considered “highly compensated”, which equates to earnings of over $145,000 in 2025.
How Much Income Can Your Assets Support In Retirement?
Many workers mistakenly assume they’ll be in the same (or higher) tax bracket in retirement because they’ll need (or be able to afford), income equal to their salary during their working years. That’s often not the case.
For example, as illustrated in my analysis here, after accounting for market volatility, generating nearly $500,000 a year in pre-tax income for 45 years would require a $15,000,000 starting retirement portfolio. Retiring later in life would, all else equal, reduce the assets needed at the onset of retirement to produce a similar level of income.
Considering State Tax
Another angle to consider is state taxes. If you are working in a state with an income tax, and plan to relocate to a state with lower income taxes or no state income taxes, then that might be another reason to consider a traditional 401(k) today.
Also speak with your tax advisor about other state-specific tax issues that may arise. For example, the Massachusetts ‘Millionaire’ Tax adds a 4% surtax to taxable income above the threshold, making tax deductions even more valuable for high earners in that state.
When To Consider Using A Roth 401(k) Instead
If none of the considerations above apply to you this year, then it could be advantageous to consider making after-tax contributions to a Roth 401(k). But consider speaking with your tax advisor first to ensure you’re not missing any important factors about your tax situation, particularly other sources of taxable income.
Finally, pre-tax and Roth 401(k) contributions won’t have the same impact on your net paycheck. So do the math first to make sure doing so won’t reduce how much you’re able to save from a cash flow perspective. If you’re not able to save the same amount after tax, then it likely isn’t worth it.
Pay Now Or Pay Later
For most high-earning workers, taking the tax break today is likely to pay off more than hoping to get one down the road. After all, there’s an opportunity cost to pre-paying tax today. As with anything, there’s never a surefire way to know which route is going to be the best one, as many aspects of the calculation are out of your control, such as future tax changes.
Disclosures
Kristin McKenna is a Forbes contributor. Examples in her articles are generic, hypothetical and for illustration purposes only and should not be misinterpreted as personalized advice of any kind or a recommendation for any specific investment product, financial or tax strategy. This general communication should not be used as the basis for making any type of tax, financial, legal, or investment decision. If you have questions about your personal financial situation, consider speaking with a financial advisor.
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