You usually get to choose, but your employer decides what's offered

Whether you can choose your 401(k) type depends on what your employer offers in their plan. Most large employers offer both a traditional 401(k) and a Roth 401(k), which means you pick one when you enroll. Some employers offer only one type. A few offer both and let you split your contributions between them. You cannot create a 401(k) type that your employer's plan does not include.

The choice matters because it changes when you pay taxes on the money. With a traditional 401(k), you contribute pre-tax dollars and pay taxes when you withdraw in retirement. With a Roth 401(k), you contribute after-tax dollars now and pay no taxes on withdrawals later. The right choice depends on whether you expect to be in a higher or lower tax bracket when you retire.

Key Takeaways

  • Your employer's plan document lists which 401(k) types are available; you cannot choose a type they do not offer.
  • Traditional 401(k) contributions reduce your taxable income this year, while Roth contributions do not.
  • You pay taxes on traditional 401(k) withdrawals in retirement, but Roth withdrawals are tax-free if you meet the rules.
  • Some employers allow you to contribute to both types in the same year, splitting your contribution between them.
  • Your choice can be changed during open enrollment each year, so you are not locked in permanently.

How to find out what your employer offers

Your employer's human resources or benefits department has a document called the plan summary or summary plan description. This document lists every option in your 401(k) plan, including which contribution types are available. You can request it from HR, or it may be posted on your company's benefits website or retirement plan portal.

Your plan's website or app will also show you during enrollment which boxes you can check. If you see only a "traditional" option, that is all your plan offers. If you see both "traditional" and "Roth," you can pick one or split between them. The enrollment system will not let you choose something that is not there.

Traditional 401(k): How the tax break works now

A traditional 401(k) contribution comes out of your paycheck before federal income tax is calculated. If you earn $50,000 a year and contribute $7,000 to a traditional 401(k), your employer reports only $43,000 as your taxable income to the IRS. You pay income tax on $43,000, not $50,000.

This tax break happens when ready. If you are in the 22% tax bracket, that $7,000 contribution saves you about $1,540 in taxes this year. The money grows tax-free inside the account. When you withdraw it in retirement, you pay ordinary income tax on the full amount you take out, including all the growth.

Traditional 401(k)s make sense if you expect your tax bracket to be lower in retirement than it is now, or if you need the tax deduction to reduce your taxable income this year.

Roth 401(k): How tax-free withdrawals work later

A Roth 401(k) contribution comes out of your paycheck after taxes have already been taken out. If you earn $50,000 and contribute $7,000 to a Roth 401(k), you still pay income tax on the full $50,000. The $7,000 goes in after-tax.

The advantage is that the money grows tax-free, and when you withdraw it in retirement, you owe no federal income tax on any of it — not the contributions you put in, and not the growth. If that $7,000 grows to $25,000 over 30 years, you withdraw all $25,000 tax-free.

Roth 401(k)s make sense if you expect your tax bracket to be higher in retirement, or if you want to lock in today's tax rate and avoid uncertainty about future tax rates. They are also useful if you want to leave tax-information programs to your heirs.

Income limits and who can use each type

Unlike Roth IRAs, there are no income limits for Roth 401(k)s. Anyone can contribute to a Roth 401(k) regardless of how much they earn. There are also no income limits for traditional 401(k)s, though high earners may lose some tax deduction benefits if they also have a workplace pension or contribute to an IRA.

The only real limit is the annual contribution cap set by the IRS, which applies to your total 401(k) contributions across all accounts. For 2024, that cap is $23,500 if you are under 50, and $31,000 if you are 50 or older. If you split between traditional and Roth, your combined contributions cannot exceed that total.

Splitting contributions between both types

If your employer offers both types, you can usually direct part of your contribution to traditional and part to Roth in the same year. For example, you might contribute $10,000 to traditional and $5,000 to Roth, as long as the total does not exceed the annual limit.

This approach lets you hedge your tax bet. You get some when ready tax relief from the traditional portion and some tax-free growth from the Roth portion. It also gives you flexibility in retirement — you can withdraw from whichever account makes sense for your tax situation that year.

Changing your choice during open enrollment

You do not have to stick with your choice forever. During your employer's annual open enrollment period, you can switch from traditional to Roth, from Roth to traditional, or start splitting between them. The change takes effect with your next paycheck after enrollment closes.

This flexibility is useful if your situation changes. If you get a big raise and expect to be in a higher tax bracket in retirement, you might switch to Roth. If you take a pay cut or expect lower retirement income, you might switch to traditional to get the tax deduction now.

Frequently Asked Questions

Can I convert my traditional 401(k) to a Roth 401(k)?

You can change your contribution type during open enrollment, but that only affects new money going forward. To move money already in a traditional 401(k) to a Roth account, you would need to do a Roth conversion, which is a separate transaction and involves paying taxes on the amount converted. Ask your plan administrator about conversion rules.

What if my employer only offers one type?

You contribute to the type they offer. If it is traditional only, all your contributions are pre-tax. If it is Roth only, all contributions are after-tax. You cannot create the other type within that employer's plan, though you could open a separate IRA outside of work if you want the other tax treatment.

Does my spouse's 401(k) type affect mine?

No. Each person's 401(k) is independent. Your spouse can have a traditional 401(k) while you have a Roth, or vice versa. Your choice depends only on your income, tax bracket, and retirement expectations, not on what your spouse chose.

Can I change my choice mid-year?

No. Your contribution type choice is locked in for the calendar year. You can only change it during open enrollment, which typically happens once a year in the fall. If you want to change before then, you would need to wait until the next enrollment period.

What happens to my 401(k) type if I change jobs?

Your old 401(k) stays as it is — traditional stays traditional, Roth stays Roth. When you start a new job, you choose based on what that employer's plan offers. You can also roll your old 401(k) into an IRA of the same type, or into your new employer's plan if they allow it.