When most people think about saving for retirement, their first instinct is often to contribute to the traditional, pre-tax side of their 401(k). After all, it feels great to watch your taxable income drop, and you get the satisfaction of “saving on taxes” today. But what about the Roth 401(k)? This powerful tool offers a different way to save, one that may set you up for greater after-tax wealth in retirement.
I’ll admit it, I personally love the Roth. Of course, no retirement strategy is one-size-fits-all, but the Roth 401(k) offers several advantages that make it worth serious consideration.
Why the Roth 401(k) is worth considering
Unlike a traditional IRA or 401(k), where contributions reduce your taxable income now but withdrawals are taxed later, the Roth flips the script. You pay the income tax on your contributions up front. Once it’s in your Roth account, that money grows tax-free, and if you follow the rules, you can withdraw everything—including all the growth—tax-free in retirement. Having a source of tax-free money in retirement can make your financial life much more flexible, giving you the power to make decisions that best suit your needs.
The Roth 401(k) also comes with much higher contribution limits than a Roth IRA. In 2025, you can contribute up to $23,500 to a Roth 401(k), compared to just $7,000 for a Roth IRA. If you’re age 50 or older, the catch-up contribution for 401(k) plans adds another $7,500, allowing a total of $31,000. And for those ages 60, 61, 62, or 63, the new super catch-up contribution boosts the max even further by $11,250, allowing up to $34,750 in Roth 401(k) deposits for the year.
By contrast, the IRA catch-up is just $1,000, permitting a total of $8,000. That means the Roth 401(k) allows you to save nearly four to five times as much annually as the Roth IRA. On top of that, Roth 401(k)s don’t come with income restrictions. Even if you earn a high salary that would make you ineligible to contribute directly to a Roth IRA, you can still take full advantage of your workplace Roth 401(k) option.
The tax implications of switching
Here’s where things get tricky and where some people get caught off guard. With a traditional 401(k), your contributions go in pre-tax. This lowers your taxable income right away and reduces the amount that gets withheld for taxes from your paycheck. When you switch to making Roth contributions, you give up that deduction today. That means your taxable income goes up, your tax bill for the year increases, and your paycheck shrinks compared to before.
To see how the Roth 401(k) affects your take-home pay, let’s imagine Sarah, age 45, who earns a salary of $100,000 per year. In 2025, the maximum she can contribute to her 401(k) is $23,500. For simplicity, let’s assume she chooses to max out her contributions, and her average effective tax rate is 20%.
Traditional 401(k) contributions:
If Sarah contributes the full $23,500 pre-tax, her taxable income is reduced from $100,000 to $76,500. At her 20% rate, she owes around $15,300 in taxes. After taxes and contributions, her take-home pay is roughly $61,200.
Roth 401(k) contributions:
If Sarah instead contributes the full $23,500 to the Roth side, her taxable income remains the full $100,000. Now her 20% tax liability is $20,000. After taxes and contributions, her take-home pay drops to $56,500.
Comparing the Two
By switching to Roth, Sarah’s annual take-home pay is about $4,700 lower than if she’d stayed with pre-tax contributions. That’s the short-term “cost” of paying taxes up front. But that $23,500 in Roth contributions has shifted into a powerful vehicle that will grow tax-free for decades, giving her a significant boost in retirement income.
After 20 years of investing with a 7% rate of return, Sarah has saved $1,073,000. Because the traditional 401(k) is fully taxable, Sarah only gets about $858,400 of usable money after paying her expected 20% retirement tax bill.
By contrast, her Roth 401(k) balance of just over $1 million is 100% tax-free! That’s more than a $214,000 difference in retirement income simply because she chose to pay taxes while working instead of in the future.
Of course, Sarah’s take-home pay is lower each year while she contributes to the Roth. But the long-term reward is the confidence and flexibility that comes with knowing part of her retirement nest egg is completely insulated from future tax rates or tax law changes.
Why adjusting withholdings matters
This example highlights why you need to review your tax withholdings if you make the switch to Roth. Sarah’s paycheck is affected because the IRS is collecting more tax now that pre-tax deductions aren’t sheltering her income. If you don’t adjust your withholdings, you could be caught short at tax time or find yourself with surprise tax bills. Planning upfront helps smooth things out so the transition feels more manageable.
Invest for growth
There’s another important consideration: how you invest the money inside your Roth 401(k). The unique advantage of the Roth lies in the fact that future growth can be withdrawn entirely tax-free. That makes growth-oriented investing especially valuable.
This doesn’t mean you should throw caution to the wind or take risks that make you uncomfortable. But keeping a Roth account in overly conservative, low-return investments could undermine its potential. The more your Roth grows, the more powerful its tax-free nature becomes. A balanced, growth-focused allocation that matches your long-term risk tolerance ensures you’re getting the most out of this account.
Don’t forget the employer match
One detail that often gets missed is how your employer match is treated. In most 401(k) plans, matching contributions are automatically deposited on the pre-tax side of your account. That’s not necessarily a problem; it simply means your match, along with its growth, will be taxable when you withdraw it in retirement.
Some employers, however, now offer the option to direct your match into the Roth side instead. If your goal is to maximize Roth savings, this can be a powerful way to grow more tax-free dollars over time. Just be aware that choosing the Roth treatment for employer contributions has an immediate trade-off: those dollars will count as taxable income in the year they’re deposited. Before you make the switch, check your plan’s rules carefully and plan ahead for the extra tax impact so it doesn’t catch you off guard.
The bottom line
There’s no one-size-fits-all answer to the pre-tax versus Roth debate. The traditional 401(k) gives you tax relief today, which can be especially useful if lowering your modified adjusted gross income (MAGI) opens the door to additional strategies—like qualifying for a Roth IRA contribution, reducing Medicare premium surcharges, or becoming eligible for certain tax credits. The Roth 401(k), on the other hand, asks you to sacrifice a little more of your paycheck now in exchange for what could be a much more valuable stream of tax-free money down the road.
It’s also important to remember that the traditional 401(k) offers its own powerful advantage: decades of tax-deferred compounding. Letting more dollars stay invested and untaxed each year can create significant growth over time. Because both the Roth and the traditional 401(k) come with meaningful benefits—and potential drawbacks—the best approach is often unique to your situation.
Choosing between the two isn’t just about tax rates; it’s about your entire financial picture, including your savings strategy, retirement timeline, and future income expectations. That’s where professional guidance can make a real difference. A CERTIFIED FINANCIAL PLANNER™ can help you weigh the trade-offs, account for the benefits of both tax-free withdrawals and tax deferral, and build a strategy designed for your unique financial situation. If you’re unsure about your next step, reach out to us today, and let’s create a plan together.
William Mock is a CERTIFIED FINANCIAL PLANNER™ at Korhorn Financial Group. He also holds his Chartered Financial Consultant (ChFC®) and Chartered Retirement Planning Counselor (CRPCSM) designations.
The examples provided in this article are hypothetical and for illustrative purposes only. They are not intended to predict or project the investment performance of any specific strategy, account, or individual. Actual results will vary based on many factors. Rates of return used in projections are not guaranteed, and all investing and investment strategies involve risk, including the possible loss of principal. Past performance is not a guarantee of future results.
