Money Girl

When Is the Roth 401(k) Right for You?

Episode Summary

This show will cover what you should know about choosing a traditional or Roth retirement account at work.

Episode Notes

Laura answers a listener’s question about choosing a traditional or Roth retirement account at work.

Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.

Have a money question? Send an email to or leave a voicemail at 302-365-0308.

Find Money Girl on Facebook and Twitter, or subscribe to the newsletter for more personal finance tips.

Money Girl is a part of Quick and Dirty Tips.


Episode Transcription

If you're struggling to save, invest, and build wealth or feel hopeless and stressed out, it's time to finally take control of your debt with my best-selling course, Get Out of Debt Fast–A Proven Plan for Debt-Free Personal Finances. It's a comprehensive and affordable online class that teaches you how to face your finances, get out of debt, and stay debt-free. You'll come away with a clear plan to eliminate credit cards, student loans, car loans, medical bills, mortgages, and any debt you have. Learn more at!

Hi, friends! I'm Laura Adams, and you're listening to the Money Girl podcast! Since 2008, I've been bringing you personal finance and small business tips every week. This show helps you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress.

If you haven't already done it, be sure to follow Money Girl on Apple Podcasts, Spotify, or wherever you listen to podcasts so you automatically get each new weekly episode! 

Also, many of the topics I cover come from your questions. You can leave a question or comment 24/7 on our voicemail line at 302-364-0308. Or email me using my contact page at

Faith F. sent me a great question. She says, "I'm 33 years old and work full time. I'm considering switching my traditional 401(k) to a Roth. I listened to your podcast about their differences, so I know the advantage of the Roth is that I will not have to pay taxes when I take distributions in retirement. But would a traditional 401(k) be more advantageous because my retirement tax bracket will be lower? Could you discuss why your retirement tax bracket may be higher or lower?"

Thank you for your question, Faith! This show will answer your question and cover what you should know about choosing a traditional or Roth retirement account at work.

ALSO READ: 7 Pros and Cons of Investing in a 401(k) Retirement Plan at Work

What is a Roth 401(k)?

Most workplace retirement plans, such as 401(k)s and 403(b)s, offer Roth options. Like a Roth IRA, they require you to make after-tax contributions. That means you don't get any tax breaks for the money you put in a Roth in the current year. However, as Faith mentioned, you make tax-free distributions in retirement, which is a big deal because you avoid tax on all earnings in your account. 

Imagine this scenario: You contribute $1,000 monthly to a Roth 401(k) starting in your mid-20s. After 40 years, you would have contributed $480,000 (40 x $12,000) from your paychecks. Assuming a 7% average annual return, your account would be worth more than $2.64 million in your mid-60s. The earnings portion of the account, or $2.16 million, would be entirely tax-free!

Remember that with a traditional retirement account, you make pre-tax contributions, giving you a tax deduction in the current year. Then you pay tax on distributions of contributions and earnings in retirement. That allows you to defer taxes but not eliminate them. 

Another similarity between a Roth IRA and Roth 401(k) is that there are no required minimum distributions (RMDs). That means you can take money out of a Roth in retirement or leave your funds in the account indefinitely. With traditional, pre-tax retirement accounts, you don't have that option and must begin RMDs at age 73, increasing your taxable income.

Let's return to my example of growing a $2.64 million nest egg, but now it's a traditional 401(k). In that case, the RMDs or larger amounts you take out would be taxable. That could make a big difference in how much you can spend in retirement.

Unlike a Roth IRA, which doesn't allow high earners to make contributions, there are no income limits for a workplace Roth, which is a fantastic benefit. Plus, the contribution limits for workplace plans are much higher. 

For 2023, you can put up to $22,500 or $30,000 if you're over 50 in a workplace 401(k) or 403(b). But you can only contribute up to $6,500 or $7,500 when you're over 50 to an IRA.

RELATED: Roth IRA vs. Roth 401(k)--10 Differences Investors Should Know

How to choose between a traditional and Roth 401(k)?

You may have heard that a Roth is great for young people because they're likely earning less now than they will in the future. In other words, if you can choose whether to pay tax now at a relatively low tax bracket or in the future at a potentially higher rate, you should opt to pay taxes now by contributing to a Roth.

However, a Roth can also make sense for older people who want to have some tax-free retirement income. Even if you aren't working in retirement, RMDs from traditional retirement accounts and income from other investments could kick you into a higher tax bracket than you anticipate.

More retirement income would increase your tax bill, including taxes on Social Security retirement benefits and the cost of Medicare part B premiums starting at age 65. That's why it's always a good idea to diversify your retirement with taxable and non-taxable income sources.

Faith asked why your retirement tax bracket may be higher or lower. You have some control over your taxes depending on whether you earn money, such as from a part-time job or business after you officially retire. 

However, we can't control the tax code. No one knows what will happen to future tax rates and income brackets. Our current tax rates are relatively low by historical standards. For instance, the top rate for married couples in 2022 was 37%, but in 1981 it was 70%, and in 1963 it was a whopping 91%!

So it's impossible to know your exact future tax liability in retirement. You have to make your best guess about what may happen with your income and taxes.

Another consideration might be estate planning and passing money to heirs. If so, a Roth has excellent advantages. If the account is at least five years old, your beneficiaries won't have to pay income taxes on distributions from an inherited Roth. So, it's a great way to transfer money to those you leave behind.

Faith, if you have high W-2 income or any additional business income and want every possible deduction to cut your tax bill, contributing to a traditional 401(k) makes sense. But if you don't need upfront tax deductions, I'd encourage you to go ahead and start making Roth 401(k) contributions. 

And for anyone unsure which account to choose, an excellent strategy is splitting your 401(k) contributions 50/50 between a traditional and Roth account so you enjoy both benefits.

That's all for now. I'll talk to you next week. Until then, here's to living a richer life.