When you started your career, you probably signed up for the traditional 401(k) plan your company offered, set your contributions at about 3% — just enough to get the company match — and you’ve never looked back. Or perhaps you just got your first job and you’re trying to navigate your company’s options for retirement planning. Should you choose a Roth 401(k) or stick with the traditional plan?
No matter what stage you’re at, it can be difficult to determine the right plan for you. People often want to open a Roth account because their coworker, neighbor or family member told them it’s the best way to save for retirement. But is that always true?
When choosing between a Roth IRA and a traditional IRA or a Roth 401(k) and a traditional 401(k), it’s important to consider all the benefits and drawbacks.
Roth Accounts
Many people love Roth IRAs and Roth 401(k)s because they offer a tax benefit when you use the money during retirement. Your contributions are taxed upfront, your account grows tax-free and qualified withdrawals are also tax-free. There are no required minimum distributions (RMDs) for Roth accounts, which means you do not have to take any money out of the account at a certain age. Instead, you can let the funds accumulate for as long as you’d like.
You can even withdraw from a Roth IRA before age 59 ½ without penalty or taxes, so long as you only take from your contributions, not your earnings. However, you will pay income taxes and a 10% early withdrawal penalty if you withdraw from your Roth IRA earnings before age 59 ½ and before you meet the five-year rule. So long as you meet the five-year rule, you can withdraw from either your contributions and earnings penalty-free and tax-free after age 59 ½.
If your current tax rate is higher than your estimated tax rate in retirement, it could be a disadvantage to save in a Roth IRA or 401(k) because you must pay taxes on your contributions today. Plus, the contribution limits for Roth IRAs are lower than traditional accounts, potentially limiting your ability to save. Lastly, many people may not qualify to open a Roth IRA. In 2025, married couples filing jointly must make less than $236,000 to contribute to a Roth IRA.
Unlike Roth IRAs, Roth 401(k)s do not have an income limit to qualify, and they have the same yearly contribution limit as a traditional 401(k) plan.
Traditional Accounts
While Roth accounts offer future tax savings, traditional IRAs and traditional 401(k)s offer tax benefits for today. Contributions are made with pre-tax dollars, which can help lower your taxable income. You might also see a greater accumulation over time because your money is growing tax-deferred.
Many employers offer contribution matches for traditional 401(k) plans, which helps grow your savings even faster. Keep in mind, it’s becoming increasingly popular for employers to offer contribution matches for Roth 401(k)s, as well.
The disadvantages of traditional accounts come into play when you want to withdraw money. Distributions are taxed as ordinary income, which means your tax bill in retirement could be sky-high if all of your money is in a traditional IRA or 401(k). Traditional accounts are subject to RMDs starting at age 73. This could increase your taxable income unnecessarily if you don’t need the money to meet your retirement expenses. In addition, traditional accounts may not benefit those who retire young because any withdrawals made before age 59 ½ will be subject to a 10% early-withdrawal penalty plus income tax.
Which Account is Right for you?
Since both types of accounts have benefits and drawbacks, there’s no clear “better” option. Consider your current tax situation. If you think your tax rate is lower than what you expect to pay in retirement, a Roth account might be the better fit. However, if you think you’ll be in a lower tax bracket in retirement, it might make more sense to defer paying taxes until you withdraw your funds. If you retire young, you may want to consider a Roth IRA to ensure you can access your savings before age 59 ½. When it comes to estate planning, Roth accounts tend to offer more benefits for creating generational wealth because beneficiaries can inherit these accounts and withdraw funds tax-free.
For many people, using both types of accounts can be beneficial. By diversifying your savings, you have the flexibility to withdraw from either account depending on your tax situation from year to year. IRAs and 401(k)s have separate contribution limits, so you can maximize your savings by contributing to both. Plus, having a mixture of pre-tax and post-tax savings might help hedge your risk against potential future changes to tax laws.
While Roth 401(k)s are becoming a more common option for employers to offer, you may only have access to a traditional 401(k) through your job. If that’s the case, you can still have access to post-tax savings by opening a Roth IRA independently.
When we create a financial roadmap for a client, we carefully consider their current and future tax strategy to help them save for retirement. We understand that financial decisions like choosing between a Roth or traditional account can be overwhelming. If you’re interested in opening a Roth IRA or curious about which type of account best fits your needs, reach out and schedule a meeting with our team.
Cetera Investment Services LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice. The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Investment Services LLC cannot guarantee or represent that it is accurate or complete. Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.