Get expert advice delivered straight to your inbox.

Skip to Main Content

Roth 401(k) vs. 401(k): Which One Is Better?

Key Takeaways

  • The Roth 401(k) is a retirement savings option that taxes your contributions up front, which means your withdrawals in retirement are tax-free, including all your growth.
  • The traditional 401(k) involves tax-deferred contributions—meaning you’ll pay taxes every time you withdraw money, including on your growth and employer contributions.
  • The Roth 401(k) comes with financial and emotional advantages. Tax-free withdrawals mean your savings stay relatively unaffected by future tax bracket adjustments (since it’s already been taxed), and you’ll feel like you have access to more of your hard-earned dollars.
  • Both Roth and traditional 401(k) contribution limits are currently set at $22,500 for 2023 ($30,000 if you’re over the age of 50), and $23,000 (30,500 if you’re over the age of 50) for 2024.

If you’ve read through your company’s benefit package lately, you might have noticed a new option when it comes to saving for retirement: the Roth 401(k). Almost 88% of 401(k) retirement plans now offer a Roth option—which is great news when it comes to taxes and keeping more of your retirement savings!

The major difference between a Roth 401(k) and a traditional 401(k) is how they’re taxed. With a Roth 401(k), your contributions are taxed up front. But when you start withdrawing at retirement, you won’t owe Uncle Sam any taxes on those contributions or their growth. The only thing you’ll still owe taxes on is any employer contributions. Sweet!

With a traditional 401(k), your money goes in tax-deferred. That’s just a fancy way of saying you’ll get a tax break now, but you will owe the IRS taxes when you start withdrawals for retirement. That also includes taxes on any employer contributions and—you guessed it—taxes on all the growth of your contributions as well.

So you can see why we’re big fans of the Roth 401(k). In fact, in a showdown between a Roth 401(k) versus a traditional 401(k), we’d go with Roth every single time! But let’s dig into the differences between these options so you can make the best decision.

What Is a Roth 401(k)?

Like a traditional 401(k), the Roth 401(k) is a type of retirement savings plan employers offer their employees—with one big difference. Roth 401(k) contributions are made after taxes have been taken out of your paycheck. That way, the money you put into your Roth 401(k) grows tax-free, and you’ll receive tax-free withdrawals when you retire.

The Roth 401(k) was introduced in 2006 and combines the best features from the traditional 401(k) and the Roth IRA. With a Roth 401(k), you can take advantage of the company match on your contributions—if your employer offers one—just like a traditional 401(k). And the Roth component of a Roth 401(k) gives you the benefit of tax-free withdrawals.

Roth 401(k) vs. Traditional 401(k): How Are They Different?

Like we discussed above, the biggest difference between a Roth 401(k) and a traditional 401(k) is how the money you put in and take out is taxed. Taxes are already super confusing (not to mention a pain to pay!), so let’s start with a simple definition, and then we’ll dive into the details.

A Roth 401(k) is a post-tax retirement savings account. That means your contributions have already been taxed before they go into your Roth account.

On the other hand, a traditional 401(k) is a pretax savings account. When you invest in a traditional 401(k), your contributions go in before they’re taxed, which makes your taxable income lower.

Roth 401(k) vs. Traditional 401(k)


Roth 401(k)

Traditional 401(k)


Contributions are made with after-tax dollars (that means you pay taxes on that money now).

Contributions are made with pretax dollars (that lowers your taxable income now, but you’ll pay taxes later in retirement).


The money you put in and its growth are not taxed (score!). However, your employer match is subject to taxes.

All withdrawals will be taxed at your ordinary income tax rate. Most state income taxes apply too.


If you’ve held the account for at least five years, you can start taking money out tax- and penalty-free once you reach age 59 1/2. You or your beneficiaries can also receive distributions due to disability or death.

You can start receiving distributions tax- and penalty-free at age 59 1/2, no matter how long you’ve had your 401(k). You or your beneficiaries can also receive distributions due to disability or death.


Since your Roth 401(k) contributions are made after-tax, you’re paying taxes now and taking home a little less in your paycheck.


How much will you need for retirement? Find out with this free tool!

Pretax traditional 401(k) contributions are taken off the top of your gross earnings before your paycheck is taxed, which will lower your tax bill for the year.

So, why would anyone choose a Roth 401(k) if it means they don’t get a tax break now? If you’re only thinking about the years you’re making contributions, that’s a fair question. But hang with us. The huge benefit of a Roth kicks in when you start withdrawing money in retirement—and the years after that.

Withdrawals in Retirement

The biggest benefit of the Roth 401(k) is this: Because you already paid taxes on your contributions, the withdrawals you make in retirement are tax-free. That’s right! The money you put in—and its growth!—is all yours. No taxes will be taken out when you use that money in retirement. (But remember, any employer match in your Roth account will still be taxable in retirement).

On the other hand, if you have a traditional 401(k), you’ll have to pay taxes on the amount you withdraw based on your current tax rate in retirement.

Here’s what that means: Let’s say you have $1 million in your nest egg when you retire. That’s a pretty nice stash! If you’ve got it invested in a Roth 401(k), most of that $1 million is yours free and clear since you already paid taxes on it.

What if that $1 million was in a traditional 401(k)? Well, you’ll have to pay taxes on every penny you withdraw in retirement. Depending on your tax bracket and what the tax rates are when you retire (and who knows what those will be), you could wind up sending hundreds of thousands of dollars in taxes to Uncle Sam throughout your golden years. That’s a hard pill to swallow, especially after you’ve worked so hard to build your nest egg!

It goes without saying that your retirement savings will last longer if you’re not paying taxes on your withdrawals. That’s what gives a Roth 401(k)—and a Roth IRA, for that matter—a huge advantage over a traditional investment account! And it’s why we always say you should take advantage of all the Roth options you have.


Another slight difference between a Roth and traditional 401(k) is your access to the money. In a traditional 401(k), you can start receiving distributions at age 59 1/2 no matter what. With a Roth 401(k), you can start withdrawing money without penalty at the same age . . . as long as you’ve had the account for at least five years.2

If you’re still decades away from retirement, you have nothing to worry about! But if you’re approaching 59 1/2 and thinking about starting a Roth 401(k), it’s important to be aware that if you access that money in the first five years, you’ll pay a penalty. We’ll break this down more when we go over the Roth 401(k) withdrawal rules in a minute.

Make an Investment Plan With a Pro

SmartVestor shows you up to five investing professionals in your area for free. No commitments, no hidden fees.

Find Your Pros

Ramsey Solutions is a paid, non-client promoter of participating pros. 

What Are the Similarities Between a Roth 401(k) and a Traditional 401(k)?

Now that we know the differences between a Roth 401(k) and a traditional 401(k), let’s talk about how they’re similar.

  1. Automatic contributions with every paycheck: Like we said before, these are both workplace retirement savings options. With either type of 401(k), your contributions are automatically taken out of your paycheck. Who said saving for retirement wasn’t easy? 
  2. Free money from your employer: Both plans usually include a company match. If you work at a place that offers a match, take it. Your employer is giving you free money! 
  3. Contribution limits: Both the Roth 401(k) and the traditional 401(k) have the same contribution limit.
      • In 2023, you can save up to $22,500 per year (or $30,000 if you’re over 50) in your account.
      • For 2024, the contribution limit is slightly adjusted for inflation to $23,000 ($30,500 if you’re over 50).
      • The opportunity to invest that much every year is a huge perk of either type of 401(k), especially when compared to an IRA’s contribution limit of $6,500 (in 2023) and $7,000 (in 2024) per year.3

The Roth 401(k) includes some of the best features of a 401(k), but that’s where their similarities end.

Why We Recommend the Roth 401(k)

If you’re investing consistently every month—whether it’s in a Roth 401(k), a traditional 401(k) or even a Roth IRA—you’re already on the right track! The most important part of wealth building is consistent saving every month, no matter what the market is doing.

We’ve already talked through the differences between these two types of accounts, so you’re probably seeing why a Roth 401(k) is such a great investing option. But just to be clear, here are the biggest reasons the Roth comes out on top:

Tax Benefit

It may be tempting to get a tax break now so you can get a little more in your paycheck today. But think about it this way: You’re already doing the hard work of saving for retirement. Why wouldn’t you do all you can to make that money go even further when you retire?

Here’s something else to think about: No one knows how the tax brackets or tax percentages will change in the future, especially if you’re still decades away from retirement. Do you want to take that risk? It may hurt a bit to pay taxes on your contributions now, but your future retirement self will thank you.

Emotional Toll

Like it or not, it’s hard to separate emotions from investing. Imagine getting to your retirement years and watching your $1 million nest egg reduced to less than $800,000 because of taxes! You'd much rather pay taxes now than see all that money fly out the door later. You'll miss $100,000 in retirement a lot more than $100 in a paycheck now.

Once you can get into the habit of investing 15% of every paycheck to your Roth 401(k) early on, you won’t even miss the money you’re paying in taxes. And when you get to retirement, you’ll be glad you don’t owe the government part of your hard-earned nest egg.

How Much Should I Invest in a Roth 401(k)?

If you’re following the Baby Steps (and you should—it’s the plan that’s shown millions of people how to pay off debt and build real wealth), you should invest 15% of your gross income into retirement savings, regardless of what your income is—as long as you’re debt-free (everything except the house) and have a fully funded emergency fund (enough to cover 3–6 months of expenses). Let’s say you make $60,000 a year. That means you would invest $750 a month in your Roth 401(k). See? Investing for the future is easier than you thought!

If you have a Roth 401(k) at work with good mutual fund options, you can invest your entire 15% there. Boom, you’re done! But if you’re not happy with your 401(k)’s investment options, then invest up to the match and max out a Roth IRA on your own.

What Kinds of Mutual Funds Should I Choose for My Roth 401(k)?

Diversifying your portfolio is key to maintaining a healthy amount of risk in your retirement savings. That’s why it's important to balance your investments among four types of mutual funds:

  • Growth and income
  • Growth
  • Aggressive growth
  • International

If one type of fund isn’t performing well during any brief market dips, the other ones can help your portfolio stay balanced. It’s like your own personal system of checks and balances!

If you’re not sure which mutual funds to put into your Roth 401(k), no problem. It’s always a good idea to sit down with an investment professional who can help you understand the different types of funds so you can choose the right mix.

What Are the Roth 401(k) Withdrawal Rules?

Are you ready to withdraw from your Roth 401(k)? Before you do, our good friend Uncle Sam has some withdrawal rules you need to know about. There are two main types of Roth 401(k) withdrawals. You can withdraw qualified distributions and nonqualified distributions. (Spoiler alert: You want to make sure all your distributions are qualified distributions.)  

Qualified Distributions

Qualified distributions are what you’re shooting for. They’re penalty-free—which means no IRS strings attached. Hopefully, these are the only types of withdrawals you ever make from your retirement accounts. You’ve worked your butt off for years—now it’s time to retire and enjoy that nest egg!

Remember, there are two basic rules you need to meet for a qualified withdrawal from your Roth 401(k): You must be 59 1/2 or older, and you must have had the account for at least five years.

We pray this is the only time you withdraw from your retirement account. But you can also take qualified distributions early if you become permanently disabled or if you pass away. In that last case, your 401(k) funds will be given to your beneficiaries.

While some plans do allow hardship distributions, they’re a terrible idea. Never borrow from or cash out your Roth 401(k) unless you’re facing bankruptcy or foreclosure. For anything else, rely on your fully funded emergency fund—that’s why Baby Step 3 (build a fully funded emergency fund) comes before Baby Step 4 (invest 15% of your income for retirement).

Nonqualified Distributions

If you don’t meet the criteria of qualified distributions and still withdraw from your Roth 401(k) early—well, don’t. This would be considered a nonqualified distribution or early withdrawal.

While you can take out your contributions tax-free (since you already paid taxes on them), your earnings (the growth of your investments) now count as gross income—meaning a portion of your withdrawal (aka distribution) will be taxed. You’ll also have to pay an additional 10% IRS early withdrawal tax penalty.4 It’s not worth it!

Plus, you’ll lose all the future growth opportunity of that money! So no, do not take from your Roth 401(k) to buy a house, pay off your student loans, or build the Man Cave or She Shack of your dreams.

Should I Convert My 401(k) to a Roth 401(k)?

There isn’t a one-size-fits-all answer when it comes to rolling over your retirement savings to a Roth account. If it makes sense for your situation, a Roth conversion is a great way to take advantage of tax-free growth on your accounts.

But keep in mind that rolling over a traditional 401(k) means paying taxes on it now. And if you’re converting a large sum all at once, it could bump you into a higher tax bracket . . . which means a bigger tax bill.

If you can pay cash for the taxes without taking money out of your nest egg and you’re still several years away from retirement, it may make sense to roll it over. But whatever you do, do not pull that money out of the investment itself!

Before you roll over accounts, sit down with an experienced investment professional. They’ll help you understand the tax impact of rolling over your 401(k) and figure out whether it makes sense for your situation.

Can I Contribute to Both a Roth 401(k) and a Traditional 401(k)?

In certain situations, you can contribute to both a Roth 401(k) and a traditional 401(k). Mostly, it depends on the options available to you. But if you have a Roth 401(k) with good growth stock mutual fund options, you don’t need to invest in a traditional 401(k). The benefits of tax-free growth and tax-free withdrawals in retirement are such a great deal, we recommend you invest your entire 15% in your Roth 401(k).

Here's how we look at it: Match beats Roth beats traditional. Let’s break it down.

  1. Match: We will always take free money. Who wouldn’t? So, if your employer offers a match, invest enough to get it all. It’s a 100% return on investment!
  2. Roth: Second, do all the Roth you can through employer-sponsored or individual accounts. At retirement age, the majority of your Roth 401(k) or IRA balance will be growth.
  3. Traditional: If you don’t have a Roth 401(k), invest up to the match in your traditional 401(k). Then max out a Roth IRA. If you still haven’t hit 15% of your income with those options, then go back to your traditional 401(k) and invest the rest.

See? Easy-peasy! Keep in mind that your employer match doesn’t count toward your 15% income investment. Think of this as icing on that big, delicious retirement cake.

Again, you’ll want to sit down with an investment professional who can walk you through these options.

Let’s Review

Phew! That’s a ton of info. So before you get going on your own Roth 401(k) adventure, let’s review:

The Roth and traditional 401(k) are both good retirement savings options. Roth 401(k) contributions are taxed up front (yep—right out of your paycheck) so when you take out your money (and its growth) during retirement, you’ll withdraw it tax-free. Traditional 401(k)s are tax-deferred—which means you’ll be taxed on your contributions and growth when you withdraw. Both Roth and traditional 401(k) options have the same contribution limit of $22,500 in 2023 ($30,000 for people over 50) and $23,000 in 2024 ($30,500 for people over 50).

We recommend the Roth 401(k) because of its emotional and financial advantages. You’ll feel like you have access to more of your money in retirement, and you’ll most likely stay unaffected by future tax bracket adjustments. Remember, match beats Roth beats traditional.


Next Steps

  • It’s a good idea to check in on your 401(k) investments at least once a year. Make sure you’re investing enough to take advantage of your company’s match and making informed investment choices.
  • Remember, a 401(k) conversion could mean a huge tax bill once Tax Day rolls around. Talk with a tax advisor before making that decision.    
  • If you want to learn more about Roth 401(k)s versus traditional 401(k)s and other investment options, it’s a good idea to sit down with an investment professional. If you need help looking for one, try our SmartVestor program.
Find an Investment Pro

Frequently Asked Questions

If your employer offers it, you’re eligible. Unlike a Roth IRA, a Roth 401(k) has no income limits. That’s a fantastic feature of the Roth option! No matter how much money you earn, you can contribute to a Roth 401(k).

If you don’t have access to a Roth option at work, you can still take advantage of the Roth benefits (as long as you meet the income requirements) by working with your investment professional to open a Roth IRA.

For 2023, the 401(k) contribution limit is $22,500. This contribution limit applies to all of your 401(k) contributions, whether they’re in a Roth or traditional 401(k). That means if you’re contributing to both, the combined total of your contributions can’t exceed that amount. And in case you were wondering, your employer’s contributions do not count toward the limit.

If you’re 50 or older, you can also pitch in an extra $7,500 as a catch-up contribution—which increases your contribution limit to $30,000.

A 401(k) is an employer-sponsored plan for retirement savings. Employees can set aside a specific amount from each paycheck to go automatically into their 401(k) for retirement savings. There are two basic types of 401(k)s—traditional and Roth. Both are employer-sponsored retirement savings plans, but they’re taxed in different ways.

An Individual Retirement Account (IRA) is a tax-favored savings account that allows you to invest for retirement with some special tax advantages—either a tax deduction now with tax-deferred growth (with a traditional IRA), or tax-free growth and withdrawals in retirement (with a Roth IRA).

Unlike a 401(k), an IRA is not sponsored by an employer. Instead, you can open an IRA through a bank, brokerage firm, or with help from a financial advisor.

This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros. 

Did you find this article helpful? Share it!

Ramsey Solutions

About the author


Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

Related Articles

Get your 401(k) questions answered.

What Is a 401(k)? Everything You Need to Know

Are you contributing to your 401(k) account at work? Make sure you're getting the most out of your investment!

Ramsey Ramsey
how does a roth ira work

What Is a Roth IRA and How Does It Work?

One of the most popular ways to save for retirement is a Roth IRA, and for good reasons. But what is a Roth IRA, and why is it such a great option for investing? Let’s discuss it.

Ramsey Ramsey