Traditional vs Roth 401(k): What Should You Choose in 2025?

Few decisions are as impactful as choosing between a traditional 401(k) and a Roth 401(k) for retirement. While both plans allow you to save for retirement with tax advantages, they differ in how contributions are taxed and when you will pay taxes on your savings. For many, understanding them is key to making an informed decision that aligns with their financial goals.

In this blog, we will break down the key features of the Traditional 401(k) and the Roth 401(k), providing an in-depth look at their benefits and limitations. We’ll also discuss when each plan is most beneficial, offer insights on how these plans work in 2025, and help you decide which option is best for you, given your income level, tax bracket, and retirement goals. Traditional vs Roth 401(k), here’s what you need to know.

What is a Traditional 401(k)?

A Traditional 401(k) is one of the most common employer-sponsored retirement plans in the U.S. The main feature of this plan is that contributions are made on a pre-tax basis. This means that the money you contribute to your 401(k) reduces your taxable income for the year you make the contribution.

How Does a Traditional 401(k) Work?

1. Contributions: You contribute pre-tax dollars from your paycheck into the 401(k). The contribution limit for 2025 is $22,500 for individuals under 50 and $30,000 for those aged 50 and older (due to catch-up contributions).
2. Tax Deferral: Since your contributions are made on a pre-tax basis, you don’t pay taxes on the money you contribute until you start withdrawing funds in retirement. This allows your money to grow tax-deferred over time.
3. Withdrawals: When you retire and begin taking distributions from your Traditional 401(k), the funds are taxed as ordinary income. This means you will pay taxes on your withdrawals based on your tax bracket at the time of withdrawal.

What is a Roth 401(k)?

A Roth 401(k) is similar to a Traditional 401(k), but the key difference is how the contributions are taxed. While contributions to a Traditional 401(k) are tax-deferred, Roth 401(k) contributions are made with post-tax dollars, meaning you pay taxes on your contributions upfront.

How Does a Roth 401(k) Work?

1. Contributions: You contribute after-tax dollars to a Roth 401(k). For 2025, the contribution limits are the same as a Traditional 401(k): $22,500 for individuals under 50, and $30,000 for those aged 50 and above.
2. Tax-Free Growth: One of the key benefits of a Roth 401(k) is that your earnings grow tax-free. Since you’ve already paid taxes on your contributions, you won’t owe any taxes when you withdraw the money in retirement — as long as you meet the necessary withdrawal criteria.
3. Withdrawals: In retirement, qualified withdrawals from a Roth 401(k) are tax-free. This is especially beneficial for individuals who expect to be in a higher tax bracket or want to maximize their tax-free income later.

Traditional 401(k) vs. Roth 401(k): Key Differences

Now that we’ve outlined how both 401(k) plans work, it’s time to compare their features. Below are the main differences between a Traditional 401(k) and a Roth 401(k) that can influence your decision.

1. Contribution Limits

The contribution limits for both plans are the same:

• $22,500 for individuals under the age of 50.
• $30,000 for those aged 50 and older (catch-up contributions).

This means that the maximum contribution for both plans is the same, but the key difference is when you’re taxed on those contributions.

2. Tax Treatment of Contributions

• Traditional 401(k): Contributions are made pre-tax, reducing your taxable income for the current year. You will pay taxes when you withdraw the funds in retirement.
• Roth 401(k): Contributions are made with post-tax dollars, meaning you pay taxes on the money upfront. However, your withdrawals will be tax-free in retirement, provided certain conditions are met.

3. Tax Benefits in the Present vs. Future

• Traditional 401(k): Offers immediate tax relief by lowering your taxable income for the current year. This could be beneficial if you are in a high tax bracket now but expect a lower one during retirement.
• Roth 401(k): Doesn’t provide immediate tax relief, but offers the benefit of tax-free withdrawals in retirement. This could be ideal if you expect to be in a higher tax bracket during retirement and want to avoid paying taxes on your retirement income.

4. Eligibility for Withdrawals

• Traditional 401(k): You can withdraw funds at age 59 ½ without penalties. However, all withdrawals are taxable as ordinary income.
• Roth 401(k): To make tax-free withdrawals from a Roth 401(k), you must be at least 59 ½ and have held the account for at least 5 years. If you meet these requirements, your withdrawals will be tax-free.

5. Required Minimum Distributions (RMDs)

• Traditional 401(k): You must begin taking RMDs (Required Minimum Distributions) at age 72. This means you must start withdrawing a certain amount of money each year from your 401(k), whether you need it or not, and you’ll be taxed on these withdrawals.
• Roth 401(k): Like a Traditional 401(k), Roth 401(k) accounts are subject to RMDs once you turn 72. However, you will not owe taxes on your RMDs from a Roth 401(k) because the account was funded with post-tax money.

Which 401(k) Is Right for You?

The decision between a Traditional 401(k) and a Roth 401(k) comes down to your financial situation and retirement goals. Here are some scenarios where each option might be more beneficial:

When to Choose a Traditional 401(k)

• High-Earning Years: If you’re in your peak earning years and need immediate tax relief, a Traditional 401(k) may be ideal. The ability to lower your taxable income today can provide significant financial relief.
• Expect to be in a Lower Tax Bracket in Retirement: If you believe your income will be lower in retirement, taking the tax benefits now could be advantageous, as you’ll pay taxes at a lower rate in the future.
• Looking for Lower Taxes Today: If current tax savings are your priority, a Traditional 401(k) can help reduce your immediate tax burden, leaving you with more take-home pay for the present.

When to Choose a Roth 401(k)

• Tax-Free Growth: If you’re willing to pay taxes now and want the benefit of tax-free growth and withdrawals in the future, a Roth 401(k) is a great choice. This option is ideal if you expect your income to grow or anticipate being in a higher tax bracket during retirement.
• Long-Term Focus: If you’re younger or have decades until retirement, the long-term tax-free growth of a Roth 401(k) can offer greater benefits as you let your contributions grow over time.
• Retirement Flexibility: A Roth 401(k) provides more flexibility in retirement since your withdrawals are tax-free, allowing you to better plan your retirement income without worrying about tax implications.

Table: Traditional 401(k) vs. Roth 401(k)

Feature	Traditional 401(k)	Roth 401(k)
Taxation on Contributions	Pre-tax contributions (reduces current taxable income)	Post-tax contributions (no immediate tax break)
Taxation on Withdrawals	Taxed as ordinary income	Tax-free if conditions met
Contribution Limits	$22,500 (under 50), $30,000 (50 and above)	$22,500 (under 50), $30,000 (50 and above)
Employer Matching	Typically pre-tax	Typically post-tax, but matching contributions grow tax-deferred
RMDs (Required Minimum Distributions)	Yes, beginning at age 72	Yes, but tax-free
Best For	High earners who need tax relief now expect a lower tax rate in retirement	Younger individuals or those expecting to be in a higher tax bracket in retirement

How Beem Can Help You Manage Your Finances Better

Whether contributing to a Traditional 401(k) or a Roth 401(k), managing your overall financial health is just as important as managing your retirement savings. Beem can help by offering financial tools that ensure you stay on top of your daily spending, manage emergency expenses, and contribute regularly to your retirement accounts. Beem’s budgeting tools give you a comprehensive view of your finances so that you can make informed decisions about both short-term spending and long-term retirement savings.

Conclusion

Choosing between a Traditional 401(k) and a Roth 401(k) depends on your current tax situation, long-term goals, and the level of control you want over your future retirement. Both options offer tax-advantaged growth, but the decision ultimately boils down to whether you prefer immediate tax relief or want to take advantage of tax-free withdrawals down the line.

With Beem’s budgeting tools, you can track your income, set up savings goals, and make smarter financial decisions to ensure you’re working toward a secure future. In addition, Beem’s Everdraft™ lets you withdraw up to $1,000 instantly and with no checks. Download the app here.

FAQs on Traditional 401(k) vs Roth 401(k)