Traditional or Roth 401(k)? How High Earners Weigh the Choice

Many employer plans allow employees to contribute to a 401(k) on either a traditional pre-tax basis or a Roth after-tax basis. For high earners, the choice is largely about when the tax is paid. The difference between the two is the timing of the tax, not the size of the contribution limit.

What the two options share

A traditional 401(k) and a Roth 401(k) are generally two ways of contributing to the same plan. For 2026, an employee can defer up to $24,500 in total across both, and an employee who reaches age 50 can add a catch-up contribution, as described in our article on 401(k) catch-up contributions. The limit is a single amount, so a person who splits contributions between the two options is still limited to $24,500 for the year.

Unlike contributions to a Roth IRA, Roth 401(k) deferrals have no income limit. A high earner who is not eligible to contribute directly to a Roth IRA can still elect Roth deferrals, if the plan offers them. Not every plan does, and the plan document and the plan administrator can confirm which options exist.

How each option is taxed

Traditional contributions are made from pay before income tax is applied, so the contribution reduces taxable wages in the year it is made. The contributions and the earnings are taxed as ordinary income when withdrawn. Roth contributions are made from pay after income tax, with no reduction in taxable wages. Qualified distributions, which are those taken after a five-taxable-year period that begins with the first year of Roth contributions to the plan and after the participant reaches age 59 and a half, or on death or disability, are tax-free, including the earnings (IRC Section 402A). A Texas resident compares federal tax only.

Both options grow without current tax on earnings inside the plan. The difference lies in which tax is paid, the one on the contribution or the one on the withdrawal. The limit also applies to dollars contributed, not to their after-tax value. A Roth contribution of $24,500 therefore represents a larger share of the account’s after-tax value than a traditional contribution of $24,500, because the tax on the Roth amount has already been paid from other funds.

Employer matching contributions

Employer matching contributions have generally been made on a pre-tax basis, even when the employee’s own contributions are Roth. SECURE 2.0 allows a plan to give employees the choice of receiving the match as a Roth contribution, which is then included in the employee’s taxable income in the year it is made (IRS Notice 2024-2). Not all plans have adopted this feature. When a plan does, the Roth match is reported as taxable income, and the employee needs to cover the tax from other funds.

Tax rate assumptions

The choice turns largely on a comparison between the tax rate that applies to a contribution now and the rate that would apply to a withdrawal later. Federal ordinary income rates range from 10% to 37%, and for 2026 the 37% rate applies to taxable income above $640,600 for single filers and $768,700 for joint filers. A person in a high bracket now might expect a lower bracket in retirement, which supports the traditional option, or might expect higher rates in the future or a larger retirement income, which supports the Roth option. Neither of these is known in advance, since tax laws and income can change.

Some features of a high earner’s income complicate the comparison. Income can vary sharply from year to year with bonuses, equity compensation or business income. A year with unusually high income can make the pre-tax deduction more valuable, and a year with lower income can make the Roth contribution more attractive. Retirement income may also be affected by Social Security, pensions and required withdrawals from other accounts.

Tax diversification

Because future rates are uncertain, some people hold both pre-tax and Roth balances. This gives them more than one type of account to draw from in retirement, and more control over the taxable income in a particular year. People who have large pre-tax balances in other accounts, or who have a spouse with a different retirement income pattern, sometimes weigh this more heavily. The same logic is sometimes applied in reverse, for those who hold mainly Roth balances and have few pre-tax accounts.

Points that affect the choice

• The current marginal federal tax rate and how it may change from year to year.
• Expected retirement income from Social Security, pensions and other accounts.
• The existing mix of pre-tax, Roth and taxable accounts.
• Whether the plan offers Roth deferrals and a Roth employer match.
• Whether the tax on a Roth contribution can be paid from other funds.
• Whether the person is subject to the rule, in effect since January 1, 2026, that requires some catch-up contributions to be Roth.
• How long until the funds would be needed, and whether the five-year period will have passed.

Traditional and Roth contributions are taxed at different times. Your tax professional can show how each would appear on your return, and your adviser can discuss the choice alongside your other retirement accounts.

This article is provided by Austin Wealth Management for general educational purposes only. It is not financial, investment, tax or legal advice, it does not consider your individual circumstances, and it does not create an advisory relationship. Austin Wealth Management provides advice and services only under a signed advisory agreement, and the terms of that agreement govern. Rules and limits change, so information here may not be current. Consult a qualified financial professional before making financial decisions.