Roth vs. Traditional Retirement Account

Roth vs. Traditional 401(k): How to Decide Which Retirement Plan is Better For You

May 20, 2019

By Colin O’Shea
Securities Analyst

We routinely meet with customers who are saving for retirement through a 401(k) or other employee sponsored retirement plan. One of the most common questions we hear is, “Is it better to contribute to a traditional or Roth account?”

In this article, we will help you compare and understand the difference between the two types of retirement plans:

Roth vs. Traditional 401(k): Understanding the Difference

Traditional: A Pre-Tax Contribution

Traditionally, you make contributions to your retirement account with “pre-tax” dollars — meaning the money for your retirement is taken out of your paycheck before federal (and, in most cases, state) taxes are applied. Why is this a good thing? In the short term, it can lower your taxable income which reduces the amount you owe for income taxes this year.

However, the money you contribute to your retirement plan will grow on a taxed-deferred basis inside the account. This means that when you finally decide to retire, at that point you will have to pay taxes on all of the money you withdraw — both your contributions and earnings. 

Who is most likely to choose a Traditional 401(k) plan? Participants who think their taxes will be lower in retirement, or are nearer to retirement, may choose traditional contributions. 

Roth: An After-Tax Contribution

If you have a Roth account, meanwhile, you will make your retirement contributions with “after-tax” dollars. Why can this be a good thing in the long term? Because paying taxes now means your contributions will grow tax-free inside of your retirement account. Neither your contributions or your earnings will be taxed upon withdrawal. 

It’s important to note a few federal law requirements when it comes to Roth retirement accounts. A Roth account must be opened at least five years before you can withdraw earnings tax-free, and you must be at least 59½ years old or disabled to avoid the IRS’s 10-percent early withdrawal penalty.

Who is most likely to choose a Roth 401(k) plan? Participants who think their taxes will be higher in the future or have a long time until retirement may choose Roth contributions. 

One more important note — even with a Roth account, you may still have some taxes on the money you withdraw in retirement. This is because any of your employer’s match or profit-sharing contributions to your account are considered “pre-tax,” so you will still be taxed for those later (just on the employee contributions, not on the earnings). 

Roth 401(k)  vs. Traditional 401(k): A Comparison Chart

Traditional 401(k)

Roth 401(k)

Tax-deferred Contributions  Yes No
 Tax-free Distributions  No Yes*
 'Annual Contribution Limits**  $19,000 (in 2019)  $19,000 (in 2019)
 Catch-up Contributions***  Yes; $6,000/year maximum (in 2019)  Yes; $6,000/year maximum (in 2019)
 Income Limits for High Earners ****  No No

*Tax-law requirements must be met
**Traditional and Roth 401(k) contributions are combined in applying maximum plan contribution
***Traditional and Roth 401(k) catch-up contributions are combined in applying maximum plan catch-up limit.
****Unlike with Roth IRAs, there is no income limit on who can contribute to a Roth 401(k). However, both traditional and Roth 401(k) contributions may be limited by a plan’s nondiscrimination rules.

Roth vs. Traditional Plan — Which is Better For You?

When it comes to choosing between a Roth or Traditional plan, neither strategy is necessarily better than the other one. It depends on many factors unique to you —  including your time horizon, current tax situation and your belief about future taxes. 

For example, If you are just starting your career and in a lower tax bracket, it may make sense to use Roth contributions. You can always switch to traditional contributions later in your career, if/when you end up in a higher income tax bracket.

However, you do not have to choose just one option:

Splitting Between a Roth and Traditional Retirement Account

Some participants decide to use a combination of traditional and Roth contributions, which can allow for tax diversification in retirement. Once you retire, you have the flexibility to take distributions from either source, depending on how it will affect your taxes at that point. 

At Security National Wealth Management, we have an experienced team of professionals who can help you choose the right combination of Roth and traditional retirement contributions. Reach out to us today!

About the Author

Colin O'Shea

Colin O'Shea is a Securities Analyst within the Wealth Management Division at Security National Bank, where he researches and analyzes assets and trade securities and helps develop investment strategies. A veteran who served in the U.S. Army for 12 years, O'Shea holds a Business Administration Degree from Morningside College.