{"id":459,"date":"2021-06-28T12:00:00","date_gmt":"2021-06-28T12:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/the-final-traditional-vs-roth-debate-traditional-wins\/"},"modified":"2025-08-29T16:49:31","modified_gmt":"2025-08-29T16:49:31","slug":"the-final-traditional-vs-roth-debate-traditional-wins","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/the-final-traditional-vs-roth-debate-traditional-wins\/","title":{"rendered":"The Ultimate Traditional 401(k) vs. Roth 401(k) Debate: Traditional Wins"},"content":{"rendered":"
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2025 Update: <\/em><\/strong>There\u2019s a much more in-depth breakdown of this thesis in Chapter 6 of Rich Girl Nation<\/em><\/a>. <\/em>If you\u2019d prefer to listen to me explain it, check out this episode<\/a> of The Money with Katie Show<\/em>. The math in this post still uses 2022 contribution limits, but the logic remains!<\/p>\n<\/div>\n

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There are so many diehard Roth fans out there that I feel like I have to duck and cover when I say this, but I’m going to say it:<\/p>\n

After doing the research that led to today’s post, I have no idea why anyone would ever opt for a Roth 401(k). Today, I’ll show you why.<\/p>\n

It’s worth making the immediate caveat here that your<\/em> Roth IRA <\/em><\/strong>is still a tax-advantaged vehicle I’d recommend using, and maybe even in tandem with what I’ll show you today\u2014but my intent is to show you why the tax deferral benefits of contributing the maximum amount ($20,500) to a Traditional 401(k) simply can’t be beat, even if effective tax rates in the future double.<\/em><\/p>\n

It all comes down to one very simple, yet powerful tweak:<\/p>\n

You have to invest the tax savings.<\/p>\n

Let me repeat:<\/p>\n

You have to invest the tax savings.<\/p>\n

While I don’t want to spend too much time today on background basics, let’s get on the same page about the difference between Roth and Traditional:<\/p>\n

When you contribute to a Traditional retirement account, you don’t pay taxes on the contribution in your current tax year. Since contributions would<\/em> be taxed (if they were Roth) in your highest marginal tax bracket<\/strong>, the savings are usually at least<\/em> a few thousand dollars.<\/p>\n

The benefit of the Roth account is that\u2014while you do<\/em> pay taxes in your highest marginal tax bracket this year\u2014you don’t have to pay taxes on the growth<\/strong> later.<\/p>\n

That begs the question: What happens \u201clater\u201d? How is Traditional 401(k) money taxed in retirement?<\/h2>\n

Let’s talk really quickly about what happens \u201clater\u201d\u2014when you withdraw<\/em> your money from your Traditional 401(k), you have to pay taxes on it, right? That’s the deal you signed up for.<\/p>\n

But you don’t pay the taxes in your highest marginal bracket.<\/p>\n

The money that you convert from Traditional to Roth in retirement is treated like earned income<\/em>, which means you’re taxed on it as if it’s income from a job.<\/p>\n

That means you get a standard deduction. That also means you\u2019re taxed \u201cbottom-up\u201d instead of \u201ctop-down.\u201d<\/p>\n

In other words, if you know anything about our progressive tax system, you know that income from your job is taxed from the lowest tax bracket up (the first $10,000 or so is taxed at 10%, the second chunk of about $30,000 is taxed at 12%, so on and so forth).<\/p>\n

While I thought I made a pretty compelling argument for why Traditional made more intuitive sense<\/span><\/a> (skip the top-down taxes now, and pay bottom-up taxes later), I got some pretty intense feedback from Roth lovers who said that the tax-free growth in a Roth account still<\/em> made it the obvious better choice.<\/p>\n

I wasn\u2019t so sure, especially because the \u201ctax-free growth\u201d argument for Roth ignores a big present-day benefit of the Traditional\u2014the tax savings that you can invest elsewhere.<\/p>\n

Even though people always say that tax rates will go up, I knew we were still comparing today’s marginal<\/strong> rates to the future’s effective<\/strong> tax rates (since the Traditional 401(k) conversions are being taxed like ordinary income when you withdraw them).<\/p>\n

I decided to do a little experiment.<\/p>\n

Before we launch in, my standard disclaimer stands:<\/strong> Trying to project anything<\/em> 50 years in the future is a fool\u2019s errand, at the end of the day. We\u2019re just using averages and the current tax code to try to make the best choices we can for the future based on what we know today, but I\u2019m not wholly convinced I won\u2019t be an immortal half-robot living on Mars in 50 years from now exchanging CatCoin for organic oil changes.<\/p>\n

The methodology<\/h2>\n

There are a few things we have to get on the same page about upfront.<\/p>\n

I’m using averages that I’d consider pretty conservative so nobody slides in my DMs with a pitchfork to let me know that I’m an optimistic dumb bitch with a public relations degree (though… guilty). The important thing is, these same averages apply across<\/em> the scenarios, so if Traditional is helped or hurt by one of our assumptions, Roth would be, too.<\/p>\n

Here are the parameters for my little mad scientist Saturday night:<\/p>\n