401(k) vs Roth 401(k): Impact on Your Paycheck (2025)

Choosing between a traditional 401(k) and a Roth 401(k) is one of the most important decisions you can make for your retirement — and it has a direct impact on every paycheck you receive. This guide explains how each option works and helps you decide which is right for your situation.

Traditional 401(k): Tax Break Now

With a traditional 401(k), your contributions are made with pre-tax dollars. This means the money you contribute is subtracted from your gross pay before federal (and in most cases state) income taxes are calculated.

• Contributions lower your current taxable income
• You pay less in taxes today, resulting in higher take-home pay compared to Roth
• Your money grows tax-deferred in the account
• You pay ordinary income tax on withdrawals in retirement
• Required minimum distributions (RMDs) begin at age 73

Roth 401(k): Tax Break Later

With a Roth 401(k), your contributions are made with after-tax dollars. You pay taxes on the money now, but qualified withdrawals in retirement are completely tax-free.

• Contributions do not reduce your current taxable income
• Your take-home pay is lower compared to traditional 401(k) contributions of the same amount
• Your money grows tax-free in the account
• Qualified withdrawals in retirement are 100% tax-free
• No RMDs starting in 2024 (thanks to SECURE 2.0 Act)

2025 Contribution Limits

These limits apply to your combined traditional and Roth 401(k) contributions. You can split your contributions between both types, but the total cannot exceed the annual limit.

How Each Affects Your Take-Home Pay

Let's compare a single filer earning $80,000 per year who contributes 10% ($8,000) to their 401(k), paid biweekly:

In this example, choosing the traditional 401(k) results in about $68 more per biweekly paycheck (roughly $1,768 more per year in take-home pay). However, the Roth contributor will owe no taxes on that money when they withdraw it in retirement.

Which Should You Choose?

The right choice depends on your current tax situation and where you expect to be in retirement:

Traditional 401(k) may be better if:

• You're currently in a high tax bracket and expect to be in a lower one in retirement
• You want to maximize your take-home pay today
• You're close to retirement and have limited time for tax-free growth
• You need the immediate tax deduction to stay in a lower bracket

Roth 401(k) may be better if:

• You're early in your career and currently in a lower tax bracket
• You expect your income (and tax rate) to rise significantly over time
• You believe tax rates will be higher in the future
• You want tax-free income in retirement for more flexibility
• You want to avoid RMDs and leave tax-free money to heirs

Consider splitting contributions

Many financial advisors recommend contributing to both types if your employer allows it. This gives you tax diversification — a mix of taxable and tax-free income sources in retirement. You'll have more flexibility to manage your tax bracket year by year.

Important: Employer Match Is Always Pre-Tax

Regardless of whether you choose traditional or Roth, your employer's matching contributions always go into a traditional (pre-tax) account. This means you'll owe income tax on employer match withdrawals in retirement either way.