One of the smartest moves you can make for your financial future is contributing to your 401(k). But should you choose a Traditional 401(k) or a Roth 401(k)? The difference comes down to when you pay taxes—and that decision can significantly impact your retirement.
This guide breaks it down to help you make the right call in 2025.
401(k) Contribution Limits for 2025
In 2025, you can contribute up to:
- $23,500 if you’re under 50
- $31,000 if you’re age 50 or older (includes a $7,500 catch-up contribution)
These limits apply across both Traditional and Roth 401(k) accounts.
Employer contributions are in addition to these limits.
Traditional vs Roth 401(k): The Core Difference
- Traditional 401(k): Contributions are pre-tax, reducing your taxable income now. You’ll pay taxes on withdrawals during retirement.
- Roth 401(k): Contributions are made with after-tax dollars. Withdrawals—including growth—are tax-free in retirement (if qualified).
The key question:
Do you want to pay taxes now or later?
Scenario 1: You Expect a Lower Tax Bracket in Retirement
If your income is currently high and you expect to spend less in retirement, a Traditional 401(k) might save you more in taxes over time.
📌 Best for:
- High earners (24%+ federal bracket)
- People nearing retirement
- Anyone expecting a significant drop in income post-career
👉 Strategy: Go 100% Traditional or consider a 50/50 mix with Roth for flexibility.
Scenario 2: You Expect a Higher Tax Bracket in Retirement
If you’re just starting your career, in a low tax bracket, or think tax rates will increase in the future, a Roth 401(k) could be your best bet.
📌 Best for:
- Early-career professionals
- Households with low current taxable income
- DIY investors optimizing for long-term tax-free growth
👉 Strategy: Focus on Roth contributions while your marginal tax rate is low.
Scenario 3: You’re Not Sure Where Your Taxes Are Headed
It’s tough to predict your future tax situation—and that’s okay. Many investors choose to split contributions between Traditional and Roth 401(k) accounts for flexibility.
📌 Strategy: Use a 50/50 approach until your long-term situation becomes clearer.
Scenario 4: You Need to Maximize Take-Home Pay
Because Traditional 401(k) contributions reduce your taxable income, they can help if cash flow is tight:
💡 Example:
If you’re in the 24% tax bracket, contributing $1,000 to a Traditional 401(k) reduces your paycheck by only $760 (before state tax).
📌 Strategy: Use Traditional contributions to lower your immediate tax burden and free up cash today.
Quick Tip: Roth 401(k) Contributions Are More Flexible Than You Think
Did you know? You can withdraw your Roth 401(k) contributions (not earnings) penalty-free before age 59½ if needed. But to withdraw earnings tax-free, you must:
- Be at least 59½
- Have held the Roth account for at least 5 years
Bottom Line: Just Start Contributing
Whether you choose a Traditional or Roth 401(k), the most important thing is to start contributing and do it consistently. You can always adjust your strategy over time as your income, tax bracket, and retirement goals evolve.
BGH (Blue Grasshopper) makes managing your 401(k) easier than ever—with tools designed to help DIY investors make smarter, tax-aware decisions.
Try it free and take control of your retirement.
Guillaume Decalf
Guillaume Decalf is a financial advisor registered with the SEC (CRD #7003690 – Firm CRD #298549). He is the founder of several successful financial firms, including Blue Grasshopper, which provides powerful tools to help individuals take control of their investments. Over the course of his career, he has advised more than 600 households and oversees over $100 million in assets under management (as of 12/31/2024).*
Registration with the SEC does not imply a certain level of skill or endorsement. More information at adviserinfo.sec.gov.