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

If you’ve read through your company’s benefit package lately, you probably noticed a new option when it comes to saving for retirement: the Roth 401(k).

Just over the last five years, the number of plans offering a Roth 401(k) has skyrocketed. About 3 out of 4 workplace retirement plans now offer a Roth option—which is great news for you!1

Younger savers (no surprises here) are starting to take advantage of this new option and the tax benefits that come with it. In fact, Gen Z is now the most likely group (14%) to put money in their Roth 401(k) at work.2

How about you? If you have a choice between a Roth and traditional 401(k) at work, which one should you choose? Let’s dig into some of 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. Folks, whenever you see tax and free in the same sentence, that’s a reason to celebrate!

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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. 

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

Let’s start with what a traditional 401(k) and a Roth 401(k) have in common.

First, 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?

Second, both plans usually include a company match. About 86% of companies that have a 401(k) also offer a match on employee contributions.3 If you work at a place that offers a match, take it. Your employer is giving you free money!

Third, both types of 401(k)s have the same contribution limit. In 2022, you can save up to $20,500 per year (or $27,000 if you’re over 50) in your account.4 The opportunity to invest that much every year is a huge perk of either type of 401(k), especially when compared to the Roth IRA’s contribution limit of $6,000 per year.5

The Roth 401(k) includes some of the best features of a 401(k), but that’s where their similarities end. Let’s dig into some of the key differences between these two retirement savings options.

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

The biggest difference between a traditional 401(k) and a Roth 401(k) is how the money you put in 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 enter 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 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 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.


With a Roth 401(k), your money goes in after-tax. That means you’re paying taxes now and taking home a little less in your paycheck.

When you contribute to a traditional 401(k), your contributions are pretax. They’re taken off the top of your gross earnings before your paycheck is taxed, which will lower your tax bill for the year.

You may be wondering why anyone would 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 that 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, 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.

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.

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.

But if you’ve got a choice between a traditional 401(k) and a Roth 401(k), we'd go with the Roth every single time! We’ve already talked through the differences between these two types of accounts, so you’re probably already seeing the benefits. 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? 

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.

Who Is Eligible for a Roth 401(k)?

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.

What Are Roth 401(k) Contribution Limits?

For 2022, the 401(k) contribution limit is $20,500. 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.6 And in case you were wondering, your employer’s contributions do not count toward the limit.

If you’re 50 or above, you can also pitch in an extra $6,500 as a “catch-up contribution”—which increases your contribution limit to $27,000.7

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

No matter what your income is, you should be investing 15% of your income into retirement savings—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, and international funds.

If one type of fund isn’t performing as well, the other ones can help your portfolio stay balanced. Not sure which funds to select based on your Roth 401(k) options? Sit down with an investment professional who can help you understand the different types of funds so you can choose the right mix.

Should I Roll Over My Traditional 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, make sure to 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.

Talk With an Investment Pro About Your Roth 401(k)

If you want to learn more about your Roth 401(k) or other investing options, sit down with a financial advisor or investment pro who can help you understand your choices so that you can make the best decision for your retirement future.

Need help looking for a qualified investment pro? Try the SmartVestor program! It’s a free way to get connected with financial advisors near you. You can start building a relationship with a pro who understands the financial journey you’re on today!

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Ramsey Solutions

About the author

Ramsey Solutions

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.

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