Roth 401(k) vs. Traditional 401(k) Calculator

A traditional 401(k) plan allows you to defer taxes on your contributions and earnings until you tap them at retirement. Your contributions lower your taxable income, which, in turn, lowers your income tax bill.

Deferring taxes on your earnings can be a powerful boost to your returns, particularly if you invest in mutual funds, many of which distribute taxable gains and interest every year. By postponing those gains, you won’t have to pay taxes on those distributions until you retire, when you may be in a lower income tax bracket.

A traditional 401(k) also makes it easier to save. Because your contributions are excluded from your taxable income, they don’t get tapped by the IRS. For example, consider a single filer who has $50,000 in income and pays 22 percent in federal and state income taxes. A 5 percent contribution to her 401(k) would be $208 a month but would reduce her paycheck by just $162.

The Roth 401(k) plan is named for the late Sen. William Roth (R-Delaware), who sponsored the 1997 federal law that created the Roth IRA. The Roth concept — contributions to the plan are not tax-deductible, but you don’t pay taxes on the money you withdraw in retirement — was extended to 401(k) plans in 2006. 

This might seem onerous when you are contributing, but future you will appreciate being able to take your distributions tax-free. Those tax-free withdrawals will include both your contributions and any growth in your investments.

Contribution limits for Roth and traditional 401(k) plans are the same. Workers under age 50 can contribute as much as $23,500 to a 401(k) plan in 2025, an increase of $500 from 2024. Most people 50 and older will be able to add another $7,500 — the same catch-up contribution amount as 2024 — for a maximum contribution of $31,000. Under a new federal provision taking effect in 2025, those ages 60 to 63 can make larger catch-up contributions — up to $11,250 (or an overall maximum of $34,750) in 2025. All these limits are adjusted annually for inflation.

You also can’t contribute more than your earned income in any year.

In most cases, if you take money out before age 59½, you’ll owe a 10 percent tax penalty on the amount, plus regular taxes at your income tax rate. If you are 58 and in the 20 percent tax bracket, you’ll owe $3,000 to the IRS on a $10,000 withdrawal — $2,000 in income taxes and $1,000 for the early withdrawal penalty.

After age 59½, you can make penalty-free withdrawals from a traditional 401(k). You’ll still owe state and federal income taxes on those funds.

You can, in some cases, take penalty-free withdrawals before age 59½. Exceptions include (but are not limited to) money you take out to cover unreimbursed deductible medical expenses that exceed 7.5 percent of your adjusted gross income, to purchase a first home or to deal with a demonstrated financial emergency. You’ll still owe taxes on the withdrawals, though.

You must start taking withdrawals by age 73, whether you need the money or not. The amount of these required minimum distributions (RMDs) depends on your age and how much money you have in tax-deferred retirement plans, including traditional 401(k)s.

You generally can withdraw your contributions to a Roth 401(k) account at any time, tax-free. After all, you’ve already paid taxes on them. But if you withdraw any of the account earnings before turning 59½, that money is taxable and subject to the 10 percent early-withdrawal penalty.

And, unlike with a Roth IRA, you can’t just claim the entire withdrawal is from your contributions. With a Roth 401(k), the IRS will deem some of what you take out to be from earnings, based on the ratio between contributions and earnings in the account. Suppose you take out $10,000 at age 50, and at the time, the money in the plan is 75 percent contributions. The IRS will treat $2,500 of the withdrawal as earnings, and you’ll owe taxes and penalties on that share.

Once you reach 59½, withdrawals (both contributions and earnings) are tax- and penalty-free, provided you made your first contribution at least five years earlier. The five-year rule supersedes the age rule, meaning that if you’re 62 but opened the Roth 401(k) only three years ago, your withdrawal is subject to the 10 percent penalty.

If you move your Roth 401(k) into a Roth IRA, the five-year clock starts ticking on the day of the rollover. Why would you roll over to a Roth IRA? Typically, you’ll have more investment choices in a Roth IRA. 

Another thing that used to be different between Roth IRAs and 401(k)s: The latter used to be subject to RMDs while the former were not. That changed in 2024 — you no longer need to make mandatory minimum withdrawals from your Roth 401(k).

This depends on your employer, but in most cases, you can borrow from a traditional or Roth 401(k). You can borrow up $50,000 or 50 percent of your balance, whichever is less, and you must repay the loan within five years. The loan can be longer if it’s for the down payment on a home. You will owe interest on the loan (payable to yourself).

The drawback: If you can’t repay the loan, it’s considered an early withdrawal; taxes and penalties will apply.

It depends on what you expect your tax situation to be in retirement.

​For example, a traditional 401(k) might make sense if you expect to be in a lower tax bracket in later life or you plan to move to a state that does not tax retirement distributions. In these scenarios, you might be better off waiting until you’re retired to pay taxes on that money. 

If current cash flow is a priority, a traditional IRA also means higher take-home pay, since contributions are deducted from your gross wages before taxes are calculated.

If your primary interest is minimizing your tax bill in retirement, though, a Roth 401(k) might be a better fit, especially if you expect your tax bracket to be the same or higher in retirement. 

That’s one reason why many financial planners recommend going the Roth route if you start saving early in your working life, so you’re taxed on the contributions when your income and tax rate are likely to be lower.

Another plus: Unlike with a traditional 401(k), the investment earnings on your Roth contributions will not be taxed when you withdraw them. 

A traditional 401(k) plan allows you to defer taxes on your contributions and earnings until you tap them at retirement. Your contributions lower your taxable income, which, in turn, lowers your income tax bill.

Deferring taxes on your earnings can be a powerful boost to your returns, particularly if you invest in mutual funds, many of which distribute taxable gains and interest every year. By postponing those gains, you won’t have to pay taxes on those distributions until you retire, when you may be in a lower income tax bracket.

A traditional 401(k) also makes it easier to save. Because your contributions are excluded from your taxable income, they don’t get tapped by the IRS. For example, consider a single filer who has $50,000 in income and pays 22 percent in federal and state income taxes. A 5 percent contribution to her 401(k) would be $208 a month but would reduce her paycheck by just $162.

The Roth 401(k) plan is named for the late Sen. William Roth (R-Delaware), who sponsored the 1997 federal law that created the Roth IRA. The Roth concept — contributions to the plan are not tax-deductible, but you don’t pay taxes on the money you withdraw in retirement — was extended to 401(k) plans in 2006. 

This might seem onerous when you are contributing, but future you will appreciate being able to take your distributions tax-free. Those tax-free withdrawals will include both your contributions and any growth in your investments.

Contribution limits for Roth and traditional 401(k) plans are the same. Workers under age 50 can contribute as much as $23,500 to a 401(k) plan in 2025, an increase of $500 from 2024. Most people 50 and older will be able to add another $7,500 — the same catch-up contribution amount as 2024 — for a maximum contribution of $31,000. Under a new federal provision taking effect in 2025, those ages 60 to 63 can make larger catch-up contributions — up to $11,250 (or an overall maximum of $34,750) in 2025. All these limits are adjusted annually for inflation.

You also can’t contribute more than your earned income in any year.

In most cases, if you take money out before age 59½, you’ll owe a 10 percent tax penalty on the amount, plus regular taxes at your income tax rate. If you are 58 and in the 20 percent tax bracket, you’ll owe $3,000 to the IRS on a $10,000 withdrawal — $2,000 in income taxes and $1,000 for the early withdrawal penalty.

After age 59½, you can make penalty-free withdrawals from a traditional 401(k). You’ll still owe state and federal income taxes on those funds.

You can, in some cases, take penalty-free withdrawals before age 59½. Exceptions include (but are not limited to) money you take out to cover unreimbursed deductible medical expenses that exceed 7.5 percent of your adjusted gross income, to purchase a first home or to deal with a demonstrated financial emergency. You’ll still owe taxes on the withdrawals, though.

You must start taking withdrawals by age 73, whether you need the money or not. The amount of these required minimum distributions (RMDs) depends on your age and how much money you have in tax-deferred retirement plans, including traditional 401(k)s.

You generally can withdraw your contributions to a Roth 401(k) account at any time, tax-free. After all, you’ve already paid taxes on them. But if you withdraw any of the account earnings before turning 59½, that money is taxable and subject to the 10 percent early-withdrawal penalty.

And, unlike with a Roth IRA, you can’t just claim the entire withdrawal is from your contributions. With a Roth 401(k), the IRS will deem some of what you take out to be from earnings, based on the ratio between contributions and earnings in the account. Suppose you take out $10,000 at age 50, and at the time, the money in the plan is 75 percent contributions. The IRS will treat $2,500 of the withdrawal as earnings, and you’ll owe taxes and penalties on that share.

Once you reach 59½, withdrawals (both contributions and earnings) are tax- and penalty-free, provided you made your first contribution at least five years earlier. The five-year rule supersedes the age rule, meaning that if you’re 62 but opened the Roth 401(k) only three years ago, your withdrawal is subject to the 10 percent penalty.

If you move your Roth 401(k) into a Roth IRA, the five-year clock starts ticking on the day of the rollover. Why would you roll over to a Roth IRA? Typically, you’ll have more investment choices in a Roth IRA. 

Another thing that used to be different between Roth IRAs and 401(k)s: The latter used to be subject to RMDs while the former were not. That changed in 2024 — you no longer need to make mandatory minimum withdrawals from your Roth 401(k).

This depends on your employer, but in most cases, you can borrow from a traditional or Roth 401(k). You can borrow up $50,000 or 50 percent of your balance, whichever is less, and you must repay the loan within five years. The loan can be longer if it’s for the down payment on a home. You will owe interest on the loan (payable to yourself).

The drawback: If you can’t repay the loan, it’s considered an early withdrawal; taxes and penalties will apply.

It depends on what you expect your tax situation to be in retirement.

​For example, a traditional 401(k) might make sense if you expect to be in a lower tax bracket in later life or you plan to move to a state that does not tax retirement distributions. In these scenarios, you might be better off waiting until you’re retired to pay taxes on that money. 

If current cash flow is a priority, a traditional IRA also means higher take-home pay, since contributions are deducted from your gross wages before taxes are calculated.

If your primary interest is minimizing your tax bill in retirement, though, a Roth 401(k) might be a better fit, especially if you expect your tax bracket to be the same or higher in retirement. 

That’s one reason why many financial planners recommend going the Roth route if you start saving early in your working life, so you’re taxed on the contributions when your income and tax rate are likely to be lower.

Another plus: Unlike with a traditional 401(k), the investment earnings on your Roth contributions will not be taxed when you withdraw them. 

A traditional 401(k) plan allows you to defer taxes on your contributions and earnings until you tap them at retirement. Your contributions lower your taxable income, which, in turn, lowers your income tax bill.

Deferring taxes on your earnings can be a powerful boost to your returns, particularly if you invest in mutual funds, many of which distribute taxable gains and interest every year. By postponing those gains, you won’t have to pay taxes on those distributions until you retire, when you may be in a lower income tax bracket.

A traditional 401(k) also makes it easier to save. Because your contributions are excluded from your taxable income, they don’t get tapped by the IRS. For example, consider a single filer who has $50,000 in income and pays 22 percent in federal and state income taxes. A 5 percent contribution to her 401(k) would be $208 a month but would reduce her paycheck by just $162.

The Roth 401(k) plan is named for the late Sen. William Roth (R-Delaware), who sponsored the 1997 federal law that created the Roth IRA. The Roth concept — contributions to the plan are not tax-deductible, but you don’t pay taxes on the money you withdraw in retirement — was extended to 401(k) plans in 2006. 

This might seem onerous when you are contributing, but future you will appreciate being able to take your distributions tax-free. Those tax-free withdrawals will include both your contributions and any growth in your investments.

Contribution limits for Roth and traditional 401(k) plans are the same. Workers under age 50 can contribute as much as $23,500 to a 401(k) plan in 2025, an increase of $500 from 2024. Most people 50 and older will be able to add another $7,500 — the same catch-up contribution amount as 2024 — for a maximum contribution of $31,000. Under a new federal provision taking effect in 2025, those ages 60 to 63 can make larger catch-up contributions — up to $11,250 (or an overall maximum of $34,750) in 2025. All these limits are adjusted annually for inflation.

You also can’t contribute more than your earned income in any year.

In most cases, if you take money out before age 59½, you’ll owe a 10 percent tax penalty on the amount, plus regular taxes at your income tax rate. If you are 58 and in the 20 percent tax bracket, you’ll owe $3,000 to the IRS on a $10,000 withdrawal — $2,000 in income taxes and $1,000 for the early withdrawal penalty.

After age 59½, you can make penalty-free withdrawals from a traditional 401(k). You’ll still owe state and federal income taxes on those funds.

You can, in some cases, take penalty-free withdrawals before age 59½. Exceptions include (but are not limited to) money you take out to cover unreimbursed deductible medical expenses that exceed 7.5 percent of your adjusted gross income, to purchase a first home or to deal with a demonstrated financial emergency. You’ll still owe taxes on the withdrawals, though.

You must start taking withdrawals by age 73, whether you need the money or not. The amount of these required minimum distributions (RMDs) depends on your age and how much money you have in tax-deferred retirement plans, including traditional 401(k)s.

You generally can withdraw your contributions to a Roth 401(k) account at any time, tax-free. After all, you’ve already paid taxes on them. But if you withdraw any of the account earnings before turning 59½, that money is taxable and subject to the 10 percent early-withdrawal penalty.

And, unlike with a Roth IRA, you can’t just claim the entire withdrawal is from your contributions. With a Roth 401(k), the IRS will deem some of what you take out to be from earnings, based on the ratio between contributions and earnings in the account. Suppose you take out $10,000 at age 50, and at the time, the money in the plan is 75 percent contributions. The IRS will treat $2,500 of the withdrawal as earnings, and you’ll owe taxes and penalties on that share.

Once you reach 59½, withdrawals (both contributions and earnings) are tax- and penalty-free, provided you made your first contribution at least five years earlier. The five-year rule supersedes the age rule, meaning that if you’re 62 but opened the Roth 401(k) only three years ago, your withdrawal is subject to the 10 percent penalty.

If you move your Roth 401(k) into a Roth IRA, the five-year clock starts ticking on the day of the rollover. Why would you roll over to a Roth IRA? Typically, you’ll have more investment choices in a Roth IRA. 

Another thing that used to be different between Roth IRAs and 401(k)s: The latter used to be subject to RMDs while the former were not. That changed in 2024 — you no longer need to make mandatory minimum withdrawals from your Roth 401(k).

This depends on your employer, but in most cases, you can borrow from a traditional or Roth 401(k). You can borrow up $50,000 or 50 percent of your balance, whichever is less, and you must repay the loan within five years. The loan can be longer if it’s for the down payment on a home. You will owe interest on the loan (payable to yourself).

The drawback: If you can’t repay the loan, it’s considered an early withdrawal; taxes and penalties will apply.

It depends on what you expect your tax situation to be in retirement.

​For example, a traditional 401(k) might make sense if you expect to be in a lower tax bracket in later life or you plan to move to a state that does not tax retirement distributions. In these scenarios, you might be better off waiting until you’re retired to pay taxes on that money. 

If current cash flow is a priority, a traditional IRA also means higher take-home pay, since contributions are deducted from your gross wages before taxes are calculated.

If your primary interest is minimizing your tax bill in retirement, though, a Roth 401(k) might be a better fit, especially if you expect your tax bracket to be the same or higher in retirement. 

That’s one reason why many financial planners recommend going the Roth route if you start saving early in your working life, so you’re taxed on the contributions when your income and tax rate are likely to be lower.

Another plus: Unlike with a traditional 401(k), the investment earnings on your Roth contributions will not be taxed when you withdraw them. 

A traditional 401(k) plan allows you to defer taxes on your contributions and earnings until you tap them at retirement. Your contributions lower your taxable income, which, in turn, lowers your income tax bill.

Deferring taxes on your earnings can be a powerful boost to your returns, particularly if you invest in mutual funds, many of which distribute taxable gains and interest every year. By postponing those gains, you won’t have to pay taxes on those distributions until you retire, when you may be in a lower income tax bracket.

A traditional 401(k) also makes it easier to save. Because your contributions are excluded from your taxable income, they don’t get tapped by the IRS. For example, consider a single filer who has $50,000 in income and pays 22 percent in federal and state income taxes. A 5 percent contribution to her 401(k) would be $208 a month but would reduce her paycheck by just $162.

The Roth 401(k) plan is named for the late Sen. William Roth (R-Delaware), who sponsored the 1997 federal law that created the Roth IRA. The Roth concept — contributions to the plan are not tax-deductible, but you don’t pay taxes on the money you withdraw in retirement — was extended to 401(k) plans in 2006. 

This might seem onerous when you are contributing, but future you will appreciate being able to take your distributions tax-free. Those tax-free withdrawals will include both your contributions and any growth in your investments.

Contribution limits for Roth and traditional 401(k) plans are the same. Workers under age 50 can contribute as much as $23,500 to a 401(k) plan in 2025, an increase of $500 from 2024. Most people 50 and older will be able to add another $7,500 — the same catch-up contribution amount as 2024 — for a maximum contribution of $31,000. Under a new federal provision taking effect in 2025, those ages 60 to 63 can make larger catch-up contributions — up to $11,250 (or an overall maximum of $34,750) in 2025. All these limits are adjusted annually for inflation.

You also can’t contribute more than your earned income in any year.

In most cases, if you take money out before age 59½, you’ll owe a 10 percent tax penalty on the amount, plus regular taxes at your income tax rate. If you are 58 and in the 20 percent tax bracket, you’ll owe $3,000 to the IRS on a $10,000 withdrawal — $2,000 in income taxes and $1,000 for the early withdrawal penalty.

After age 59½, you can make penalty-free withdrawals from a traditional 401(k). You’ll still owe state and federal income taxes on those funds.

You can, in some cases, take penalty-free withdrawals before age 59½. Exceptions include (but are not limited to) money you take out to cover unreimbursed deductible medical expenses that exceed 7.5 percent of your adjusted gross income, to purchase a first home or to deal with a demonstrated financial emergency. You’ll still owe taxes on the withdrawals, though.

You must start taking withdrawals by age 73, whether you need the money or not. The amount of these required minimum distributions (RMDs) depends on your age and how much money you have in tax-deferred retirement plans, including traditional 401(k)s.

You generally can withdraw your contributions to a Roth 401(k) account at any time, tax-free. After all, you’ve already paid taxes on them. But if you withdraw any of the account earnings before turning 59½, that money is taxable and subject to the 10 percent early-withdrawal penalty.

And, unlike with a Roth IRA, you can’t just claim the entire withdrawal is from your contributions. With a Roth 401(k), the IRS will deem some of what you take out to be from earnings, based on the ratio between contributions and earnings in the account. Suppose you take out $10,000 at age 50, and at the time, the money in the plan is 75 percent contributions. The IRS will treat $2,500 of the withdrawal as earnings, and you’ll owe taxes and penalties on that share.

Once you reach 59½, withdrawals (both contributions and earnings) are tax- and penalty-free, provided you made your first contribution at least five years earlier. The five-year rule supersedes the age rule, meaning that if you’re 62 but opened the Roth 401(k) only three years ago, your withdrawal is subject to the 10 percent penalty.

If you move your Roth 401(k) into a Roth IRA, the five-year clock starts ticking on the day of the rollover. Why would you roll over to a Roth IRA? Typically, you’ll have more investment choices in a Roth IRA. 

Another thing that used to be different between Roth IRAs and 401(k)s: The latter used to be subject to RMDs while the former were not. That changed in 2024 — you no longer need to make mandatory minimum withdrawals from your Roth 401(k).

This depends on your employer, but in most cases, you can borrow from a traditional or Roth 401(k). You can borrow up $50,000 or 50 percent of your balance, whichever is less, and you must repay the loan within five years. The loan can be longer if it’s for the down payment on a home. You will owe interest on the loan (payable to yourself).

The drawback: If you can’t repay the loan, it’s considered an early withdrawal; taxes and penalties will apply.

It depends on what you expect your tax situation to be in retirement.

​For example, a traditional 401(k) might make sense if you expect to be in a lower tax bracket in later life or you plan to move to a state that does not tax retirement distributions. In these scenarios, you might be better off waiting until you’re retired to pay taxes on that money. 

If current cash flow is a priority, a traditional IRA also means higher take-home pay, since contributions are deducted from your gross wages before taxes are calculated.

If your primary interest is minimizing your tax bill in retirement, though, a Roth 401(k) might be a better fit, especially if you expect your tax bracket to be the same or higher in retirement. 

That’s one reason why many financial planners recommend going the Roth route if you start saving early in your working life, so you’re taxed on the contributions when your income and tax rate are likely to be lower.

Another plus: Unlike with a traditional 401(k), the investment earnings on your Roth contributions will not be taxed when you withdraw them. 

A traditional 401(k) plan allows you to defer taxes on your contributions and earnings until you tap them at retirement. Your contributions lower your taxable income, which, in turn, lowers your income tax bill.

Deferring taxes on your earnings can be a powerful boost to your returns, particularly if you invest in mutual funds, many of which distribute taxable gains and interest every year. By postponing those gains, you won’t have to pay taxes on those distributions until you retire, when you may be in a lower income tax bracket.

A traditional 401(k) also makes it easier to save. Because your contributions are excluded from your taxable income, they don’t get tapped by the IRS. For example, consider a single filer who has $50,000 in income and pays 22 percent in federal and state income taxes. A 5 percent contribution to her 401(k) would be $208 a month but would reduce her paycheck by just $162.

The Roth 401(k) plan is named for the late Sen. William Roth (R-Delaware), who sponsored the 1997 federal law that created the Roth IRA. The Roth concept — contributions to the plan are not tax-deductible, but you don’t pay taxes on the money you withdraw in retirement — was extended to 401(k) plans in 2006. 

This might seem onerous when you are contributing, but future you will appreciate being able to take your distributions tax-free. Those tax-free withdrawals will include both your contributions and any growth in your investments.

Contribution limits for Roth and traditional 401(k) plans are the same. Workers under age 50 can contribute as much as $23,500 to a 401(k) plan in 2025, an increase of $500 from 2024. Most people 50 and older will be able to add another $7,500 — the same catch-up contribution amount as 2024 — for a maximum contribution of $31,000. Under a new federal provision taking effect in 2025, those ages 60 to 63 can make larger catch-up contributions — up to $11,250 (or an overall maximum of $34,750) in 2025. All these limits are adjusted annually for inflation.

You also can’t contribute more than your earned income in any year.

In most cases, if you take money out before age 59½, you’ll owe a 10 percent tax penalty on the amount, plus regular taxes at your income tax rate. If you are 58 and in the 20 percent tax bracket, you’ll owe $3,000 to the IRS on a $10,000 withdrawal — $2,000 in income taxes and $1,000 for the early withdrawal penalty.

After age 59½, you can make penalty-free withdrawals from a traditional 401(k). You’ll still owe state and federal income taxes on those funds.

You can, in some cases, take penalty-free withdrawals before age 59½. Exceptions include (but are not limited to) money you take out to cover unreimbursed deductible medical expenses that exceed 7.5 percent of your adjusted gross income, to purchase a first home or to deal with a demonstrated financial emergency. You’ll still owe taxes on the withdrawals, though.

You must start taking withdrawals by age 73, whether you need the money or not. The amount of these required minimum distributions (RMDs) depends on your age and how much money you have in tax-deferred retirement plans, including traditional 401(k)s.

You generally can withdraw your contributions to a Roth 401(k) account at any time, tax-free. After all, you’ve already paid taxes on them. But if you withdraw any of the account earnings before turning 59½, that money is taxable and subject to the 10 percent early-withdrawal penalty.

And, unlike with a Roth IRA, you can’t just claim the entire withdrawal is from your contributions. With a Roth 401(k), the IRS will deem some of what you take out to be from earnings, based on the ratio between contributions and earnings in the account. Suppose you take out $10,000 at age 50, and at the time, the money in the plan is 75 percent contributions. The IRS will treat $2,500 of the withdrawal as earnings, and you’ll owe taxes and penalties on that share.

Once you reach 59½, withdrawals (both contributions and earnings) are tax- and penalty-free, provided you made your first contribution at least five years earlier. The five-year rule supersedes the age rule, meaning that if you’re 62 but opened the Roth 401(k) only three years ago, your withdrawal is subject to the 10 percent penalty.

If you move your Roth 401(k) into a Roth IRA, the five-year clock starts ticking on the day of the rollover. Why would you roll over to a Roth IRA? Typically, you’ll have more investment choices in a Roth IRA. 

Another thing that used to be different between Roth IRAs and 401(k)s: The latter used to be subject to RMDs while the former were not. That changed in 2024 — you no longer need to make mandatory minimum withdrawals from your Roth 401(k).

This depends on your employer, but in most cases, you can borrow from a traditional or Roth 401(k). You can borrow up $50,000 or 50 percent of your balance, whichever is less, and you must repay the loan within five years. The loan can be longer if it’s for the down payment on a home. You will owe interest on the loan (payable to yourself).

The drawback: If you can’t repay the loan, it’s considered an early withdrawal; taxes and penalties will apply.

It depends on what you expect your tax situation to be in retirement.

​For example, a traditional 401(k) might make sense if you expect to be in a lower tax bracket in later life or you plan to move to a state that does not tax retirement distributions. In these scenarios, you might be better off waiting until you’re retired to pay taxes on that money. 

If current cash flow is a priority, a traditional IRA also means higher take-home pay, since contributions are deducted from your gross wages before taxes are calculated.

If your primary interest is minimizing your tax bill in retirement, though, a Roth 401(k) might be a better fit, especially if you expect your tax bracket to be the same or higher in retirement. 

That’s one reason why many financial planners recommend going the Roth route if you start saving early in your working life, so you’re taxed on the contributions when your income and tax rate are likely to be lower.

Another plus: Unlike with a traditional 401(k), the investment earnings on your Roth contributions will not be taxed when you withdraw them. 

A traditional 401(k) plan allows you to defer taxes on your contributions and earnings until you tap them at retirement. Your contributions lower your taxable income, which, in turn, lowers your income tax bill.

Deferring taxes on your earnings can be a powerful boost to your returns, particularly if you invest in mutual funds, many of which distribute taxable gains and interest every year. By postponing those gains, you won’t have to pay taxes on those distributions until you retire, when you may be in a lower income tax bracket.

A traditional 401(k) also makes it easier to save. Because your contributions are excluded from your taxable income, they don’t get tapped by the IRS. For example, consider a single filer who has $50,000 in income and pays 22 percent in federal and state income taxes. A 5 percent contribution to her 401(k) would be $208 a month but would reduce her paycheck by just $162.

The Roth 401(k) plan is named for the late Sen. William Roth (R-Delaware), who sponsored the 1997 federal law that created the Roth IRA. The Roth concept — contributions to the plan are not tax-deductible, but you don’t pay taxes on the money you withdraw in retirement — was extended to 401(k) plans in 2006. 

This might seem onerous when you are contributing, but future you will appreciate being able to take your distributions tax-free. Those tax-free withdrawals will include both your contributions and any growth in your investments.

Contribution limits for Roth and traditional 401(k) plans are the same. Workers under age 50 can contribute as much as $23,500 to a 401(k) plan in 2025, an increase of $500 from 2024. Most people 50 and older will be able to add another $7,500 — the same catch-up contribution amount as 2024 — for a maximum contribution of $31,000. Under a new federal provision taking effect in 2025, those ages 60 to 63 can make larger catch-up contributions — up to $11,250 (or an overall maximum of $34,750) in 2025. All these limits are adjusted annually for inflation.

You also can’t contribute more than your earned income in any year.

In most cases, if you take money out before age 59½, you’ll owe a 10 percent tax penalty on the amount, plus regular taxes at your income tax rate. If you are 58 and in the 20 percent tax bracket, you’ll owe $3,000 to the IRS on a $10,000 withdrawal — $2,000 in income taxes and $1,000 for the early withdrawal penalty.

After age 59½, you can make penalty-free withdrawals from a traditional 401(k). You’ll still owe state and federal income taxes on those funds.

You can, in some cases, take penalty-free withdrawals before age 59½. Exceptions include (but are not limited to) money you take out to cover unreimbursed deductible medical expenses that exceed 7.5 percent of your adjusted gross income, to purchase a first home or to deal with a demonstrated financial emergency. You’ll still owe taxes on the withdrawals, though.

You must start taking withdrawals by age 73, whether you need the money or not. The amount of these required minimum distributions (RMDs) depends on your age and how much money you have in tax-deferred retirement plans, including traditional 401(k)s.

You generally can withdraw your contributions to a Roth 401(k) account at any time, tax-free. After all, you’ve already paid taxes on them. But if you withdraw any of the account earnings before turning 59½, that money is taxable and subject to the 10 percent early-withdrawal penalty.

And, unlike with a Roth IRA, you can’t just claim the entire withdrawal is from your contributions. With a Roth 401(k), the IRS will deem some of what you take out to be from earnings, based on the ratio between contributions and earnings in the account. Suppose you take out $10,000 at age 50, and at the time, the money in the plan is 75 percent contributions. The IRS will treat $2,500 of the withdrawal as earnings, and you’ll owe taxes and penalties on that share.

Once you reach 59½, withdrawals (both contributions and earnings) are tax- and penalty-free, provided you made your first contribution at least five years earlier. The five-year rule supersedes the age rule, meaning that if you’re 62 but opened the Roth 401(k) only three years ago, your withdrawal is subject to the 10 percent penalty.

If you move your Roth 401(k) into a Roth IRA, the five-year clock starts ticking on the day of the rollover. Why would you roll over to a Roth IRA? Typically, you’ll have more investment choices in a Roth IRA. 

Another thing that used to be different between Roth IRAs and 401(k)s: The latter used to be subject to RMDs while the former were not. That changed in 2024 — you no longer need to make mandatory minimum withdrawals from your Roth 401(k).

This depends on your employer, but in most cases, you can borrow from a traditional or Roth 401(k). You can borrow up $50,000 or 50 percent of your balance, whichever is less, and you must repay the loan within five years. The loan can be longer if it’s for the down payment on a home. You will owe interest on the loan (payable to yourself).

The drawback: If you can’t repay the loan, it’s considered an early withdrawal; taxes and penalties will apply.

It depends on what you expect your tax situation to be in retirement.

​For example, a traditional 401(k) might make sense if you expect to be in a lower tax bracket in later life or you plan to move to a state that does not tax retirement distributions. In these scenarios, you might be better off waiting until you’re retired to pay taxes on that money. 

If current cash flow is a priority, a traditional IRA also means higher take-home pay, since contributions are deducted from your gross wages before taxes are calculated.

If your primary interest is minimizing your tax bill in retirement, though, a Roth 401(k) might be a better fit, especially if you expect your tax bracket to be the same or higher in retirement. 

That’s one reason why many financial planners recommend going the Roth route if you start saving early in your working life, so you’re taxed on the contributions when your income and tax rate are likely to be lower.

Another plus: Unlike with a traditional 401(k), the investment earnings on your Roth contributions will not be taxed when you withdraw them. 

A traditional 401(k) plan allows you to defer taxes on your contributions and earnings until you tap them at retirement. Your contributions lower your taxable income, which, in turn, lowers your income tax bill.

Deferring taxes on your earnings can be a powerful boost to your returns, particularly if you invest in mutual funds, many of which distribute taxable gains and interest every year. By postponing those gains, you won’t have to pay taxes on those distributions until you retire, when you may be in a lower income tax bracket.

A traditional 401(k) also makes it easier to save. Because your contributions are excluded from your taxable income, they don’t get tapped by the IRS. For example, consider a single filer who has $50,000 in income and pays 22 percent in federal and state income taxes. A 5 percent contribution to her 401(k) would be $208 a month but would reduce her paycheck by just $162.

The Roth 401(k) plan is named for the late Sen. William Roth (R-Delaware), who sponsored the 1997 federal law that created the Roth IRA. The Roth concept — contributions to the plan are not tax-deductible, but you don’t pay taxes on the money you withdraw in retirement — was extended to 401(k) plans in 2006. 

This might seem onerous when you are contributing, but future you will appreciate being able to take your distributions tax-free. Those tax-free withdrawals will include both your contributions and any growth in your investments.

Contribution limits for Roth and traditional 401(k) plans are the same. Workers under age 50 can contribute as much as $23,500 to a 401(k) plan in 2025, an increase of $500 from 2024. Most people 50 and older will be able to add another $7,500 — the same catch-up contribution amount as 2024 — for a maximum contribution of $31,000. Under a new federal provision taking effect in 2025, those ages 60 to 63 can make larger catch-up contributions — up to $11,250 (or an overall maximum of $34,750) in 2025. All these limits are adjusted annually for inflation.

You also can’t contribute more than your earned income in any year.

In most cases, if you take money out before age 59½, you’ll owe a 10 percent tax penalty on the amount, plus regular taxes at your income tax rate. If you are 58 and in the 20 percent tax bracket, you’ll owe $3,000 to the IRS on a $10,000 withdrawal — $2,000 in income taxes and $1,000 for the early withdrawal penalty.

After age 59½, you can make penalty-free withdrawals from a traditional 401(k). You’ll still owe state and federal income taxes on those funds.

You can, in some cases, take penalty-free withdrawals before age 59½. Exceptions include (but are not limited to) money you take out to cover unreimbursed deductible medical expenses that exceed 7.5 percent of your adjusted gross income, to purchase a first home or to deal with a demonstrated financial emergency. You’ll still owe taxes on the withdrawals, though.

You must start taking withdrawals by age 73, whether you need the money or not. The amount of these required minimum distributions (RMDs) depends on your age and how much money you have in tax-deferred retirement plans, including traditional 401(k)s.

You generally can withdraw your contributions to a Roth 401(k) account at any time, tax-free. After all, you’ve already paid taxes on them. But if you withdraw any of the account earnings before turning 59½, that money is taxable and subject to the 10 percent early-withdrawal penalty.

And, unlike with a Roth IRA, you can’t just claim the entire withdrawal is from your contributions. With a Roth 401(k), the IRS will deem some of what you take out to be from earnings, based on the ratio between contributions and earnings in the account. Suppose you take out $10,000 at age 50, and at the time, the money in the plan is 75 percent contributions. The IRS will treat $2,500 of the withdrawal as earnings, and you’ll owe taxes and penalties on that share.

Once you reach 59½, withdrawals (both contributions and earnings) are tax- and penalty-free, provided you made your first contribution at least five years earlier. The five-year rule supersedes the age rule, meaning that if you’re 62 but opened the Roth 401(k) only three years ago, your withdrawal is subject to the 10 percent penalty.

If you move your Roth 401(k) into a Roth IRA, the five-year clock starts ticking on the day of the rollover. Why would you roll over to a Roth IRA? Typically, you’ll have more investment choices in a Roth IRA. 

Another thing that used to be different between Roth IRAs and 401(k)s: The latter used to be subject to RMDs while the former were not. That changed in 2024 — you no longer need to make mandatory minimum withdrawals from your Roth 401(k).

This depends on your employer, but in most cases, you can borrow from a traditional or Roth 401(k). You can borrow up $50,000 or 50 percent of your balance, whichever is less, and you must repay the loan within five years. The loan can be longer if it’s for the down payment on a home. You will owe interest on the loan (payable to yourself).

The drawback: If you can’t repay the loan, it’s considered an early withdrawal; taxes and penalties will apply.

It depends on what you expect your tax situation to be in retirement.

​For example, a traditional 401(k) might make sense if you expect to be in a lower tax bracket in later life or you plan to move to a state that does not tax retirement distributions. In these scenarios, you might be better off waiting until you’re retired to pay taxes on that money. 

If current cash flow is a priority, a traditional IRA also means higher take-home pay, since contributions are deducted from your gross wages before taxes are calculated.

If your primary interest is minimizing your tax bill in retirement, though, a Roth 401(k) might be a better fit, especially if you expect your tax bracket to be the same or higher in retirement. 

That’s one reason why many financial planners recommend going the Roth route if you start saving early in your working life, so you’re taxed on the contributions when your income and tax rate are likely to be lower.

Another plus: Unlike with a traditional 401(k), the investment earnings on your Roth contributions will not be taxed when you withdraw them.