Roth 401(k) or Traditional (Pre-Tax): Most People Get it WRONG

Is a traditional vs Roth 401(k) better for taxes? Common advice says that a Roth is only for low earners, and that traditional 401(k)s are always better for high earners. But in many cases, the math tells a different story. The real answer depends on future taxes, required minimum distributions, Medicare surcharges, and even what happens when you pass money to your kids.

Traditional vs Roth401(k): What’s the Real Difference?

With a traditional 401(k) or IRA, you get a deduction today. In the eyes of the IRS, it’s as if you didn’t make that money at all. It doesn’t affect your tax bracket today. You pay taxes later when you withdraw it.

With a Roth 401(k) or Roth IRA, you pay the taxes now. The growth and the withdrawals are tax-free later. So the real question is, which tax rate is going to be lower for you? Today’s or tomorrow’s? Let’s break it down. 

Tax Rates Today vs. History

Right now, the top federal tax rate is 37%.

If you go back in history:

• In the 1970s, the top marginal rate was nearly 70%.
• In the 1950s, it was over 90%.
• Even in the 1980s, it reached 45%.

Compared to history, we’re living in one of the lowest tax environments we’ve seen in about 70 years. That’s why many people argue that Roth is a no-brainer. You pay the tax now, lock in today’s lower rate, and never worry about taxes in the future. This runs counter to the standard advice that assumes you’ll be in a lower tax bracket in retirement and should choose traditional today.

Of course, no one knows for sure, but if you believe Congress may raise taxes in the future to address debt and spending, Roth becomes a better long-term plan. You have to ask yourself if you’re willing to bet that tax rates will stay this low for the next 20 to 30 years.

SEE ALSO: 4 Retirement Traps No One Tells You About

Marginal Rate Arbitrage: Compare Now vs. Later

Marginal rate arbitrage is just another way of saying compare your tax rate today to your expected tax rate later. If you’re in the high bracket now and think you’ll be in a much lower bracket in retirement, traditional contributions might make sense. If you’re in a moderate bracket now (22% or 24%) and you think retirement income plus RMDs plus maybe a pension could push you into a higher bracket later, Roth could possibly give you an advantage.

Here’s what you should look at now. What’s your marginal tax rate today? How much income will you need in retirement? Will that income come from:

• Social Security
• Pension
• Investment accounts
• Required Minimum Distributions (RMDs)

You don’t want to follow blanket advice when it comes to traditional vs Roth 401(k)s. Look at your personal situation, your income trajectory, and your likely tax bracket in retirement. If you’re unsure how to run the numbers, work with a financial advisor who can model the scenarios and help you make a decision based on your specific situation.

Required Minimum Distributions (RMDs): This Where People Get Blindsided

This is where a lot of people get surprised. If you have money in a traditional IRA or 401(k), the IRS doesn’t let it grow tax-deferred forever. Starting at age 73 or 75, depending on when you were born, you’re required to begin taking withdrawals whether you need the money or not. Those withdrawals are treated as ordinary income. Even if you don’t need the money to live on, it stacks on top of Social Security, pension income, and any other income you have. That stacking effect can push you into a higher tax bracket, trigger higher Medicare premiums, and limit your flexibility.

For example, if you have $2 million in a traditional IRA at age 73, your first RMD will be roughly $75,000. Layer that on top of Social Security and a pension, and you could easily find yourself in a higher bracket than you expected. Now increase that balance. If someone has $3.5 million in a traditional IRA, their RMD could be around $140,000 per year. In some cases, that pushes total income well beyond what they actually need to live on. That means they’re being forced to take income they don’t need and pay taxes on it anyway.

Let’s say they have $2.5 million in Roth and $1 million in traditional. When they reach age 73, their RMD might be around $42,000 instead of over $130,000. Now, their Social Security, pension, and RMDs line up much more closely with what they actually need. When you look at their tax brackets, most of their income falls into the lower bracket rather than spilling into higher ones.

Planning ahead matters. If you’re heavily weighted toward traditional accounts, your future RMDs could end up dictating your tax bill in retirement instead of you dictating it yourself. When we talk about Traditional vs Roth 401(k), it’s also about avoiding potentially getting handcuffed by RMDs later on. 

SEE ALSO: How to Reduce Required Minimum Distributions (RMDs) and Taxes

Medicare IRMAA: The Hidden Cost

Medicare IRMAA ( the Income-Related Monthly Adjustment Amount) is a surcharge you pay on Medicare premiums if your income goes above certain thresholds. Traditional withdrawals count toward that income. Roth withdrawals do not.

Medicare Part B & Part D Premiums (2026)

Note: MAGI = Adjusted Gross Income (AGI) + Tax-Exempt Interest. Premiums shown are monthly and per person.

Let’s say you need an additional $50,000 in a given year. If that money comes from a traditional IRA, it increases your modified adjusted gross income. That can push you into a higher IRMAA bracket. These brackets work like cliffs. If your income crosses a threshold, you don’t just pay a little more. You pay the full additional premium for that bracket.

In one example, that could mean:

• An extra $185 per month for Medicare Part B
• An additional $35 per month for Part D

If you’re married and both spouses are on Medicare, that number gets doubled. That can easily add up to $5,000 or more in higher annual premiums. Over 20 years, that’s roughly $100,000 in additional Medicare costs because your income came from traditional accounts instead of Roth. Now compare that to pulling the same $50,000 from a Roth account. If that same $50,000 comes from Roth, your Medicare premiums don’t change. That flexibility can save you real money.

Inheritance: The SECURE Act and the 10-Year Rule

Under the SECURE Act, most non-spouse heirs now have to empty inherited retirement accounts within 10 years. That’s a big change from the old rules, where they could stretch distributions over their lifetime.

If your heirs inherit a traditional IRA or 401(k), they have to take that money out as taxable income. That means those withdrawals could be added to their salary, pushing them into a higher tax bracket. It can create a real tax burden.

Now compare that to inheriting a Roth IRA. They still have to empty the account within 10 years, but the withdrawals are tax-free. The growth during those 10 years is also tax-free. Think about it. Your children may each be in different tax brackets. If they inherit a traditional IRA, they may end up with very different after-tax amounts, even if the account was split evenly.

With a Roth, that issue largely disappears. From a legacy standpoint, Roth is often the cleaner asset to pass down. It’s tax-free, simpler for your heirs, and keeps more money in your family’s pocket instead of sending it to the IRS.

How to Choose a Traditional vs Roth 401(k)?

Historically low tax rates make Roth contributions compelling. But marginal rate arbitrage means the real question is personal. What is your tax rate today, and what will it likely be in retirement? Required minimum distributions can push income above expectations. Traditional withdrawals can trigger Medicare IRMAA surcharges. And from a legacy standpoint, Roth accounts often pass to heirs more efficiently. 

There is no one-size-fits-all answer. For some high earners, traditional contributions still make sense. For many others, Roth offers meaningful long-term flexibility. Often, the smartest approach is a balance between the two. If you’re unsure which strategy fits your situation, review your tax return and project your retirement income sources. 

Work With a Fiduciary Advisor Who Can Run the Numbers

At Paces Ferry Wealth, we model different tax scenarios so you can see how Roth and traditional contributions may affect your retirement income, Medicare costs, and long-term legacy. Instead of following blanket advice, you’ll have a strategy built around your specific numbers and goals. If you’d like clarity on which direction makes sense for you, schedule a conversation with our team. 

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.