Traditional vs. Roth 401(k): Select the Right Retirement Savings Plan for You

Man Computer Desk Decision

Do you think taxes will be higher or lower by the time you’re ready to retire? 

Without a time machine, none of us know how the tax system will shift during our years before retirement. We do, however, have choices on how we handle our taxes today. 

Taxes are important to consider when deciding whether a traditional 401(k) or Roth 401(k) is right for you. Nextep’s 401(k) gives you the ability to choose. Here’s a rundown.

Traditional 401(k): Pay Taxes Later

Let’s say your annual income is $35,000, and you contribute $3,000 into a traditional 401(k). Your 401(k) contributions are deducted from your paycheck before any taxes are taken out. When you file your taxes, you have reduced your taxable income from $35,000 to $32,000. 

Reducing your taxable income allows you to pay less in taxes during your working years. However, if you don’t pay taxes on your 401(k) contributions when you put them into your account, the IRS will require you to pay taxes as you take them out.* Withdrawals in retirement will be taxed like working income, whether those dollars are what you contributed or are investment earnings. 

Traditional 401(k) Pros

Traditional 401(k) Cons

  • Pay less in taxes during your working years
  • Pay taxes on the earnings of your contributions
  • Pay taxes at an unknown, future tax rate
Roth 401(k): Pay Taxes Now

A Roth 401(k) works differently. Let’s take the same $35,000 annual income and contribute $3,000 into a Roth 401(k). This contribution will be deducted from your paycheck after your taxes are paid. When you file your taxes, your taxable income will still be reported as $35,000. 

There aren’t tax savings during your working years for contributions into a Roth 401(k). The benefit of a Roth is enjoyed in retirement. Because taxes are paid on Roth contributions upfront, you will be able to take qualified distributions in retirement tax-free*— including investment earnings. 

Roth 401(k) Pros

Roth 401(k) Cons

  • Withdraw money in retirement tax-free
  • Any earnings on your contributions are tax-free
  • Pay taxes at a known, current rate
  • Pay higher taxes during your working years

Since none of us know what the future holds, you might consider splitting your savings between traditional and Roth contributions. Essentially, you would have two buckets of money within your 401(k) account that would give you the freedom to choose how to withdraw money in the most tax-efficient way. Just like investors diversify their investment strategies, you can diversify your tax strategies.

Keep in mind, if your employer offers a company match, employer match dollars in your account will always be traditional, and their pre-tax contributions will be taxed at retirement. 

Check out this Roth vs. Traditional calculator to compare the plans and choose which one may be right for you. 

Your Nextep 401(k) team is here to help! Our 401(k) has a financial advisor who can help you look at all the factors to consider when deciding if a traditional 401(k) or a Roth 401(k) is right for you. 

We would love to partner with you in creating a retirement savings plan! Reach out to us at 401k@nextep.com

*Early withdrawal penalties and income taxes may apply if you withdraw from a 401(k).

Also on Nextep

8 Easy Ways to Save Money on Health Care Costs Admittedly, there are many things out of your control when it comes to healthcare costs. But, there are still steps you can take that add up to more dollars in your pocket. Following these tips can help save money on health care costs. Use preventive […]
Read more
Virtual doctor visits via telehealth are on the rise We’ve long touted the benefits of telehealth. These virtual doctor visits, conducted via phone or video rather than in-person, are a great way to get help for several health issues. Commonly handled diagnoses include Allergies Bronchitis Earache Sore throat Sinusitis Tobacco cessation Pink eye Strep throat […]
Read more
At Nextep, we know the end of the year brings taxes top of mind for many. It also may be easy to forget about 2023 benefit limits that can impact your taxes.  Partnering with a PEO like Nextep means you can easily get all the details you need. Here is a cheat sheet of some […]
Read more
The IRS has released FSA and HSA limits for 2023. A flexible spending account (FSA) allows you to deduct a set amount of pre-tax money from each paycheck to pay for certain IRS-qualified out-of-pocket health expenses, such as medical copays, dependent care, prescription drugs, transit, and parking. Aside from the annually allowed rollover amount ($610 in […]
Read more
While Nextep always offered personalized benefit support to your people, we’re taking it to a whole new level with Health Advocate! Nextep clients and their employees will always get an optimal benefits experience with one-on-one consultations to manage their health questions.  “I’ve personally experienced the headache of trying to choose the right benefit plan for […]
Read more
Finding a PEO can be a daunting task. You should feel confident in your partnership with Nextep or any PEO for that matter. To ensure you do, we’ve put together a short checklist of questions to ask in your meetings with PEOs.  1. What accreditations and certifications do you hold?  A few credentials you’ll want […]
Read more
“[Switching to] Nextep was a no-brainer. The costs are better and the amount of personalized attention and follow-up we received right off the bat was really impressive. With Nextep, we’re not just a number. Nextep is so responsive to our questions and our needs. We didn’t have that in the past with our previous provider.” — Yaicha, […]
Read more
Telehealth services like Teladoc® can provide 24/7/365 access to a doctor by web, phone, or mobile app.  Whether you have a minor illness or a chronic condition, telehealth has become an essential tool for many employees by saving them time and money. A National Library of Medicine study shows people using their telehealth are more engaged in their health care. […]
Read more
With a vast range of individual and family situations, it’s essential to provide benefits that meet your employees’ needs wherever they are in life.  Much like your workplace policies, your employee benefits should align with your diversity and inclusion (D&I) goals. Look at your benefits annually and ask yourself if they reflect your workforce’s needs, […]
Read more
Even before the pandemic, no one wanted to sit in a doctor’s waiting room feeling ill or with a sick child.  Now, with COVID-19 cases on the rise and winter’s seasonal illnesses upon us, it’s more important than ever to have a telehealth option for your employees.  At Nextep, we partner with Teladoc® to offer […]
Read more
It’s time to prepare for next year’s medical expenses, but it can be tough to know how much to set aside.  That’s one advantage of enrolling in a flexible spending account (FSA) or a health savings account (HSA). It allows you to prepare for expected and unexpected medical expenses. An FSA and HSA allow you […]
Read more
Americans are spending less and stashing away more cash than ever, but healthy financial habits are still essential. According to the U.S. Department of Commerce, people were saving about 7.5% of income before the COVID-19 pandemic and now are socking away 14%. People may be saving more because of fear of job loss or because […]
Read more

Download Our App