Roth 401(k) or traditional 401(k)? Same plan, same limit, and one big difference: when you pay the tax.
Written for business owners and employees choosing how to make their 401(k) deferrals, including S-corp owners with a Solo 401(k).
The short answer
A Roth 401(k) isn’t a separate plan. It’s a tax choice inside the same 401(k). Every dollar you defer from your paycheck goes in one of two ways: pre-tax (traditional) or after-tax (Roth).
Traditional: you skip the tax today and pay it on every dollar you withdraw in retirement. Roth: you pay the tax today, and the money plus all its growth comes out tax-free. Which one wins depends on whether your tax rate is higher now or in retirement.
Side by side
| Traditional 401(k) | Roth 401(k) | |
|---|---|---|
| Tax break | Deduction now; lowers this year’s taxable wages | None now; no tax on qualified withdrawals |
| 2026 deferral limit | $24,500 combined ($32,500 at age 50+; $35,750 at ages 60–63) | |
| Income limit to contribute | None | None, unlike a Roth IRA |
| Withdrawals in retirement | Taxed as ordinary income | Tax-free after age 59½ and 5 years in the account |
| Early withdrawals | Taxed, plus a 10% penalty in most cases | The earnings portion is taxed and penalized in most cases |
| Required minimum distributions | Yes, starting at age 73 | None during your lifetime (since 2024) |
| W-2 Box 1 wages | Reduced by the deferral | Not reduced |
| W-2 Box 12 code | D | AA |
| Employer contributions | Pre-tax by default | Allowed as Roth only if the plan permits it |
The limit is shared. You can split it, for example $12,000 Roth and $12,500 traditional, but you can’t put $24,500 in each.
See the difference: $10,000 of salary over 30 years
Say you set aside $10,000 of pay, you’re in a combined 29.5% tax bracket today (22% federal plus about 7.5% state and local), and the money earns 7% a year for 30 years.
You pay $2,950 of tax now, so $7,050 goes in. It grows to $53,667, and all of it is yours, tax-free.
The full $10,000 goes in and grows to $76,123. What you keep depends on your tax rate when you take it out.
The rule that falls out of the math: if your tax rate is the same in retirement, Roth and traditional come out exactly even. Traditional wins if your rate will be lower later. Roth wins if it will be higher. Everything else is a guess about your future tax rate.
When each one tends to win
- You’re early in your career or in a low bracket now
- You expect your income, or tax rates, to rise
- You want income in retirement that won’t raise your taxes or your Medicare premiums
- You want to leave money to heirs tax-free, with no required withdrawals
- You’re in a high bracket now, at your peak earning years
- You expect a lower income in retirement
- You plan to retire in a state with low or no income tax
- You need the tax savings now, to free up cash for other goals
Why many people do both
Nobody knows what tax rates will be in 20 or 30 years. Splitting your deferrals gives you both kinds of money in retirement, which lets you choose each year which bucket to draw from. That flexibility lets you fill up the low tax brackets with traditional withdrawals and take anything beyond that from Roth, tax-free.
any way you like
both grow
For S-corp owners with a Solo 401(k)
A few details work differently when you’re both the employee and the employer.
- Your QBI deduction isn’t affected by the choice. It’s based on the S-corp’s profit, which drops by your salary, the S-corp’s FICA, and its profit-sharing contribution either way. Roth vs. traditional only changes the tax on your W-2 wages.
- Roth keeps your IRA eligibility. IRA contributions are limited to your W-2 Box 1 wages. A traditional deferral can shrink Box 1 to almost nothing, while a Roth deferral leaves it untouched.
- Roth needs room for withholding. Because Roth doesn’t lower taxable wages, payroll will still try to withhold income tax. If you defer nearly your whole paycheck, plan to cover that tax another way.
- The employer contribution may have to be traditional. The law now allows Roth employer contributions, but many plans, including Schwab’s Individual 401(k), keep profit-sharing pre-tax. That alone gives you some traditional money every year.
And the Roth IRA?
Higher limit ($24,500 for 2026), no income limit, and run through payroll. Withdrawals before retirement include a share of earnings.
Separate $7,500 limit for 2026, with income limits. Your contributions can come out at any time, tax- and penalty-free. You can have both.
Quick decision guide
- Low bracket now: lean Roth
- Peak earnings, high bracket: lean traditional
- Not sure: split 50/50
- Need cash for a near-term goal: traditional frees it up
- Want heirs to inherit tax-free: Roth
- S-corp profit-sharing: usually traditional
- Revisit the split every year
- Check your Box 12 code on your W-2
Not sure which mix is right for you?
We’ll look at your bracket now, your likely bracket in retirement, and your QBI and IRA situation, then recommend a Roth and traditional split for this year.
Or call 516-261-2171
Sources
- IRS: Roth comparison chart
- IRS: One-participant 401(k) plans
- 2026 plan contribution limits (IRS Notice 2025-67)
This article is for general educational purposes and is not individual investment, tax, or legal advice. The $10,000 example is hypothetical; it assumes a constant 7% annual return, a 29.5% combined tax rate today, and no fees, and it doesn’t reflect any specific investment. Roth withdrawals are tax-free only when qualified. Limits shown are for 2026.