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401(k) Challenges

Traditional or Roth 401(k)? Decide with This 401(k) Calculator

Many employer-sponsored retirement plans now offer a Roth 401(k) in addition to a traditional 401(k). Use our calculator to find out which is a better fit for you.

Articles by Nick Holeman, CFP®

By Nick Holeman, CFP®
Financial Planning Expert, Betterment  |  Published: May 23, 2016

Understanding the differences between a traditional and Roth 401(k) can help save you taxes now and later.

For those who choose a traditional 401(k), contributions are made on a pre-tax basis, and you’ll pay taxes when you withdraw these funds in retirement.

Roth 401(k) contributions are made with after-tax dollars, so you won’t have to pay taxes on this money later in life.

Blank laptop screen on a wooden slab with coffee cup, notebook and cell phone, mock up

You may have previously associated Roth accounts only with Individual Retirement Accounts (IRAs), but with more employers offering a Roth option as part of a 401(k) plan, it’s important to understand the differences between a traditional and Roth 401(k).

Participating in your employer’s 401(k) plan is already a big step toward achieving your retirement goals. Now, the question to ask is whether you should contribute to a Roth or traditional 401(k).

Which 401(k) should you choose? The answer depends on your personal situation and your retirement goals. We developed a calculator to help you decide. Get started below.

Roth and Traditional 401(k)s: What’s the Difference?

In an effort to encourage retirement savings, the government created 401(k) accounts, as well as 403(b), 457, and Thrift Savings Plan (TSP) accounts for government and nonprofit employees.

When you contribute part of your income to these accounts, you benefit from special tax advantages that you wouldn’t receive from contributing to non-retirement, taxable accounts.

They also include features such as allowing employers to match your contributions up to a certain amount, and also the option for you to make either pre-tax (traditional) or after-tax (Roth) contributions. This distinction is similar to Roth and traditional IRAs. Both account types offer unique benefits. Here are the differences:

  • Pre-Tax (Traditional) 401(k): Contributions made with pre-tax income will result in a tax deduction for the amount contributed. Contributions are not counted as income, and they will lower your tax bill come April. When you contribute pre-tax, you are allowing your assets to grow on a tax-deferred basis. By the time you retire and begin to pull money out of your account, every dollar withdrawn (including the growth) is taxable as ordinary income.
  • After-Tax (Roth) 401(k): Roth contributions are the opposite of pre-tax contributions. While this option may not have been widely available in the past, many retirement plans now offer it. When you contribute to these accounts, you won’t receive a tax break, but all growth and qualified1 future withdrawals are tax-free. Because you already paid taxes on this money when you contributed to the account, you won’t be taxed on this money when you withdraw it in the future.

Should I Pay Taxes Now or Later?

The answer depends on many variables, including your current tax bracket and which tax bracket you expect to be in during retirement.

For example, if you foresee your income and earnings climbing in the future, either due to job promotions, higher income as a result of an advanced degree, or a more financially rewarding career ahead, then you may fall into a higher tax bracket later.

If you foresee your income decreasing, for example if you are planning on retiring, taking some time off, or leaving the workforce, then you will likely fall into a lower tax bracket in the future.

As a general rule:

  • If your current tax bracket is higher than your expected tax bracket in retirement, you should choose the traditional, pre-tax option.
  • If your current tax bracket is the same or lower than your expected tax bracket in retirement, you should choose the Roth option.

Our calculator can help you estimate and choose the option that is more favorable for your personal situation, depending on when and how you wish to pay taxes on your 401(k) contributions. This strategy is called tax arbitrage. By picking the correct type of retirement contributions, you have more control over your taxes than you’d think.

What Else Should I Consider?

Taxes are not the only factor you should consider when deciding between Roth and traditional 401(k)s, or between funding an IRA and a 401(k).

Many other factors can affect the overall growth of your retirement accounts, such as employer matches, fees, and contribution limits.

For example, let’s say you have both a traditional and Roth 401(k) option at your job. If taxes were your only concern, a traditional 401(k) might make the most sense. But if your 401(k) has high fees and no employer match, you may be better off opening and contributing to a Roth IRA instead.

Employer Match

Many employers offer to match your contributions up to a percentage of your salary. This means that your company will add money to your account as a way of encouraging you to contribute to your plan. In many cases you won’t want to pass up the opportunity to receive this free money.


Fees can be a huge drag on your retirement savings. If your 401(k) has particularly high fees, this can reduce or even eliminate the savings you would get from its tax benefits.

Contribution Limits

Contribution limits can vary between account type and age, and these limits periodically get adjusted for inflation. Making sure you are up-to-date with the most recent laws and limits can help you save even more money for retirement.


Roth/traditional IRAs are another option you have for retirement savings, and can be used instead of, or in conjunction with, your 401(k). Using both in an efficient way can make sure you are optimizing every dollar you save. The tax rules with IRAs vary depending on your income, but our calculator will take that into account for you.

Our Calculator Automates This For You

Betterment’s calculator helps you choose which retirement plan to contribute to in a smart and simple way.

First, our calculator uses your current income to estimate your tax rate now and in retirement.

Then we project how your balance will grow over time, and determine which account will provide the highest after-tax balance at retirement. This is because you’ll only care about what portion of your accounts you can actually spend during retirement.

Example 401(k) calculator results

The calculator above is a simplified version of Betterment’s RetireGuide, our retirement planning tool.

RetireGuide tracks your personalized retirement plan and is always optimizing in which accounts to save based on your investment progress and life events. In addition to account selection, RetireGuide considers your current income as well as future retirement income (including Social Security income), and how much you should target in saving each year.

When it comes to planning for retirement, the choice of Roth or traditional 401(k) contributions is just as critical as selecting the proper investments. Let our tools give you the peace of mind you are making the right decision.

Getting Started with Betterment

Betterment handles your investments so you don’t have to. We make it easy to roll over your retirement accounts (or get new accounts set up), and everything we do is designed to help you save money on taxes.

You can also easily sync your outside retirement accounts, even if your employer offers a Betterment 401(k), so we can give you better advice around your entire financial picture. Our customer support team is available seven days a week to answer any questions. Get started today.

1Qualified withdrawals generally begin at age 59.5, however exceptions may apply.

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