Roth 401(k) vs. Traditional 401(k): What’s the Actual Difference?

Whether you're setting up your first retirement account or maybe you’ve had one for a while and you’re wondering if it's time to switch things up, a good first question is: Does your employer even offer a Roth 401(k) alongside the traditional one? Both have their upsides for saving for retirement and you don’t have to just pick one. Here’s everything you need to know about Roth 401(k)s vs. traditional 401(k)s:

What is a Traditional 401(k)?

Think of a traditional 401(k) as “pay taxes later.” A chunk of your paycheck goes into the account before taxes are taken out, which lowers your taxable income for the year, giving you a little upfront tax break you’ll feel right away. Your investments then grow tax-deferred (which is just a fancy way of saying you don’t owe anything on the earnings until you actually pull the money out in retirement). At that point, withdrawals get taxed as ordinary income.

What is a Roth 401(k)?

Where traditional 401(k)s are “pay taxes later,” a Roth 401(k) is “pay taxes now.” You fund it with after-tax dollars, so your contributions don’t shrink your taxable income today. The payoff comes later when you’re 59½ years old and qualified withdrawals are completely tax-free, as long as the account has been open for at least five years by that point.

How Are They Alike? Both accounts live inside an employer-sponsored retirement plan and they share the same annual contribution limit. In 2026, you can contribute up to $24,500 across both, plus an extra $8,000 catch-up contribution once you turn 50. Under SECURE 2.0, savers aged 60 to 63 get an even bigger catch-up of up to $11,250. Employers can match contributions to either type of plan. One detail worth knowing: Those matching dollars usually land in a traditional 401(k) account, regardless of whether your own contributions go traditional or Roth. 

How Are They Different?

The big one is when you pay taxes. Traditional 401(k) contributions are tax-deferred, meaning you get the upfront tax break and a tax bill later. Roth 401(k) contributions are after-tax where you take the tax hit now and withdraw tax-free in retirement.

The second difference is the five-year rule. Roth 401(k) withdrawals only qualify for tax-free treatment once the account has been open for at least five years and you’ve hit age 59½. A traditional 401(k) has no equivalent holding requirement. 

What is the Right One for Me?

Honestly, it comes down to tax efficiency and your own situation. The question you should ask yourself is, “Do you think your income tax rate today is higher or lower than it’ll be in retirement?”

If you think your rate today is higher than it’ll be later, pre-tax (traditional) contributions can make sense. You lower your tax bill now and only pay taxes when you withdraw.

If you think your rate today is lower than it’ll be later, which is often the case for young professionals just starting their careers, Roth after-tax contributions can be the smarter move. You pay taxes now at a lower rate and then owe nothing on those withdrawals in retirement.

For a lot of people, the best answer is both. Splitting contributions between traditional and Roth gives you tax diversification — more flexibility to manage your tax bill year to year in retirement, since you can pull from whichever account makes sense at the time.

If you’re still not sure which way to lean, it’s worth talking to an advisor. A Johnson Financial Group advisor can help you build a plan that fits your life. Want to see in real time which contribution type might be right for you? Use our calculator to figure out which path to take.