Traditional vs. Roth 401(k): A 2024 Cheat Sheet

• Market return = 6% (based on historical returns for an inflation-adjusted 60/40 portfolio) 
• Everyone contributes to the account for 35 years. At year 35, accounts are converted to an after tax value. 
• Excess savings from traditional 401(k) deductions are invested in an after-tax brokerage account. (This is key!) Dividends are not reinvested in the brokerage account, but after-tax returns are used.
• Tax rate used for liquidation of traditional 401(k) assets is equal to a single year value of the retirement distribution. This is to avoid unrealistic liquidation of entire account. 
• Retirement tax rate is assumed to use same tax brackets as today.
• Expenses assumed to be 50% of salary. Expenses in retirement are 75% of today’s expenses. 
• Inflation is not taken into account. 
• Not taking into account other retirement accounts. 
• No employer matches used.
• For $50k salary assume only 50% max out of 401(k).

Your expected tax rate has an impact.

We used California, Pennsylvania, and Texas as examples because they represent high, medium, and low tax rates, respectively.

You can see that the low tax rates in Texas made a Roth worth it for Terry, when he’s making $50k per year. While no one can perfectly predict where they’ll live in the future, these scenarios cover a broad range.  

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Yes, Iif your employer offers both, you can contribute to a Roth 401(k) and a traditional 401(k).

However, keep in mind that your annual contribution limit would apply across both accounts. It’s also possible that there are other smart moves you could make, instead of funding a Roth.

• Tax rates go up. If you are extremely confident that your income (and therefore your tax rates) will only increase over time then a Roth would make sense.
• Not investing today’s tax savings. Our analysis assumes that the tax savings from the traditional 401(k) deduction are invested in a taxable brokerage account. If you plan on spending the money or only putting it in cash, then a Roth would be a better fit.
• Spending more in retirement. Planning on increasing your spend during retirement? The more you spend, the more you withdraw from your account. If it’s a Roth, you won’t be paying taxes on those withdrawals. 
• Your heirs will need to live off your retirement assets. The estate tax exclusion may change over time, but right now it’s about $13.5m for an individual and $27m for a joint couple. If you plan to leave more than that, or if your 401(k) money will be needed by your heirs, then a Roth is a better fit. There are no required minimum distributions for you or your heirs.