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June 5, 2025

The great debate: Key considerations when choosing between Roth and traditional 401(k) plans

Summary

First, let’s back up to your first few weeks on a new job. One item on your to-do list is to enroll in the company’s defined contribution plan. One of the first elections you’ll make is the employee contribution rate. Once selected, you will need to choose whether your contribution—let’s say 6%—will be made on a pre-tax or Roth basis. Will your whole 6% contribution be pre-tax? How about Roth? What about 3% and 3%? In this article, we will discuss concepts that may drive your decision-making.

With these examples in mind, selecting Roth vs. pre-tax comes down to a simple question: Will I save money by paying taxes now or later?

When preparing for retirement, factors like your age, where you live, and your current financial situation may impact your retirement strategy. In this article, we’ll look at these factors and how they may influence your decisions around choosing a traditional 401(k) plan, a Roth plan, or a mix of both.

What are pre-tax and Roth retirement plan contributions?

Pre-tax and Roth contributions are two types of retirement plans offered by an employer. Pre-tax contributions are made to a retirement plan, like a 401(k) or 403(b), before taxes are deducted from your paycheck. This lowers your taxable income now, but withdrawals in retirement are taxed as ordinary income. 

Roth after-tax contributions, on the other hand, are made with money that has already been taxed. While there’s no immediate tax break, qualified withdrawals—including earnings—are tax-free in retirement.

The pros and cons of instant gratification

For many people, the choice is easy: why pay now if I can pay later? According to Bernstein, 72% of plan participants agree and choose the pre-tax option. Many want the benefit of reducing their current year’s taxes and seeing a large portfolio when they log in to their recordkeeper’s website. 

With these contributions, you can increase the amount of money you initially take home by paying taxes at the time of retirement. However, since taxes are based on the year retirement occurs, the exact portion you will owe with a pre-tax plan is unknown. 

To remove uncertainty, it may be more beneficial to delay that gratification in the form of a Roth contribution. It’s important to think about your personal situation and have the foresight to consider your future self and what you may benefit from. 

Delaying the gratification of a tax break through pre-tax contributions may be wise if it makes financial sense for you.

Diversifying your portfolio

Let’s say you are at an ice cream shop, and you must choose between three flavors: chocolate, vanilla, or a chocolate and vanilla twist. Choosing the twist and having the best of both worlds is also an option when it comes to retirement plan contributions. Tax diversification can be just as important as investment diversification in some cases. 

In today’s political and economic climate, there will always be unforeseen circumstances. Job layoffs, pay cuts, and inflation are all examples of unforeseen circumstances that affect an individual’s ability to contribute to an employer plan and an individual retirement plan. The closer an individual is to retirement, the more likely they are to have a better gauge of their retirement plan. Depending on how close an individual is to retiring, there may not be any new retirement and tax legislation that would affect them.

While there is no magic number for splitting pre-tax and Roth contributions, you need to keep in mind the tax bracket you fall into now and what you may be in when you retire. Having two buckets of money is that much more powerful in retirement. 

Every year in retirement looks different from a financial standpoint. You may be able to pull from Roth funds for a certain situation and pre-tax funds from another, or you may plan to draw down one account first. Making contributions to both could help you.

Your current financial situation

Looking at your current financial situation is imperative when making a proper decision in the great debate. Many times, when you enter the workforce, you are typically in a lower tax bracket and may benefit in the long term from Roth contributions. 

On the other hand, well-established, tenured, successful employees may currently be in a higher tax bracket and could benefit from deferring taxes (pre-tax). 

Many employees make Roth contributions in their 20s and 30s and convert to pre-tax contributions in their 40s, 50s, and 60s.

The state you retire in matters

One of the most popular states to retire in is Florida. On top of the year-round warm weather and beaches, Florida is known as a “retiree’s paradise” because it has no state income tax. Some employees may plan to retire in a state with low to no income tax, like Florida, years in advance. Some may already have a second home in a state with low to no income tax and plan to retire there. 

Regardless, the state in which you plan to retire may impact your goals for pre-tax vs. Roth contributions. For example, let’s say you are in the highest state income tax bracket in New York at 10.9%, but you plan to retire in Florida and become a Florida resident. What type of contributions make sense in this scenario? Making pre-tax contributions makes more sense because you would defer the 10.9% New York state tax and withdraw the funds state income tax-free in Florida. 

You would still pay federal tax rates but would plan accordingly for state and local taxes. Now, let’s say you start to realize this desire around 45-50 years old and do not plan to retire until 65. This could mean 15-20 years of contributions that could add up to a considerable amount of money and taxes saved down the road.

How much are you currently deducting and to what accounts?

Are you currently enrolled in a high-deductible health plan (HDHP) and contributing to a health savings account (HSA)? Is your spouse doing the same? 

Is your spouse contributing to an employer plan, and is your spouse contributing on a pre-tax or Roth basis? Do you or your spouse contribute to a traditional individual retirement account (IRA)?

Especially if you are filing a joint tax return, these factors can affect your marginal income tax bracket and reduce your adjusted gross income (AGI). For the HSA and traditional IRA, and possibly your spouse’s 401(k), all of these contributions are made with pre-tax dollars. 

If you answered yes to some of these questions, you may benefit from some tax diversification. Roth contributions to your employer plan may help diversify if a majority of your retirement portfolio is made up of pre-tax dollars.

No one can predict the future

To be better equipped to make these decisions, we recommend being proactive by adjusting your retirement strategy. Individuals’ lives are always changing, so it’s important to periodically review your Roth versus pre-tax contributions.

Raising your contribution rate can be beneficial when you receive a raise, pay off a loan, or find ways to save in your budget. If you suspect or receive notice of an upcoming bonus, it may make sense to defer that bonus to your employer plan and contribute it pre-tax if possible.

Sometimes, individuals switch careers and may need to take a pay cut. In such cases, they might move down a tax bracket or two and should consider making Roth contributions.

Things are constantly changing, not just in the United States but around the world. In your everyday life, changes will happen. Changes will also occur in the tax code. These are things you may not be able to control but will need to be prepared for in case things do not go your way. 

Having a thorough, well-thought-out plan is imperative for making decisions in the great debate of Roth vs. pre-tax.

How Can Marsh McLennan Agency help?

We always recommend working with a financial coach to discuss your retirement plan strategy. Our MMA Prosper Wise℠ team of knowledgeable advisors can provide personalized guidance tailored to your financial goals. 

We will help you navigate the complexities of retirement planning and identify the most suitable strategies for securing your future. MMA Prosper Wise℠ provides tools, education, and personalized coaching to help you prepare for and manage your retirement plans. 

Learn more about our retirement tools and resources.

Securities and investment advisory services are offered through MMA Securities LLC (MMA Securities), member FINRA/SIPC, and a federally registered investment advisor. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Variable insurance products are distributed by MMA Securities LLC, CA OK 81142. Marsh & McLennan Insurance Agency LLC and MMA Securities LLC are affiliates owned by Marsh & McLennan Companies. Investment advisory services for MMA Prosper Wise℠ are offered solely as a registered investment adviser through MMA Securities. Certain of our investment adviser representatives are registered representatives of MMA Securities. A copy of our written disclosure statement discussing our advisory services and fees is available for your review upon request. Please consult a tax professional for specific tax inquiries and recommendations.
 

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