When it comes to retirement planning, people usually wrestle with the choice between traditional and Roth 401(k) contributions. This seemingly simple decision can have serious implications on their financial wellbeing for years to come. In an environment where we’re talking about rising or new taxes, that’s particularly critical. Certified public accountant Jeff Levine and certified financial planner Cody Garrett provide insights on how to navigate these decisions effectively.
Financial habits and personal finance educator Jennifer Levine tells TaxVox that timing is everything, even when it comes to paying taxes. He recommends, “Your intent should be to pay tax when the rate is at its lowest. This principle is particularly important given the highly progressive nature of U.S. federal income tax brackets. Under this structure, different levels of income are taxed at different rates.
Take, for instance, someone earning a gross income of $200,000 in 2025. They would benefit from the default deduction of $15,750. As a result, their taxable income would be $184,250. This person is subject to several tax brackets due to how their taxable income is divided up. Therefore, they still owe a total tax of $37,067, for an effective tax rate of 18.5%.
Garrett points out that as bad as that sounds, the highest marginal tax rate is only 24%. A person would need to make more than $326,900 to even reach that effective rate. This discrepancy often leads individuals to mistakenly weigh their current tax situation against potential future rates when determining their contributions to retirement accounts.
- $11,925 taxed at 10%: $1,192.50
- $36,550 taxed at 12%: $4,386
- $54,875 taxed at 22%: $12,072.50
- $80,900 taxed at 24%: $19,416
“Everyone talks in marginal rates, but lived experiences are [your] true effective rates,” Garrett observes. This statement highlights that the effective tax rate—calculated by dividing total tax by gross income—provides a clearer picture of one’s actual tax burden compared to marginal rates that can often mislead financial decisions.
Roth contributions are made with after-tax dollars, so the balance grows tax-free. This characteristic renders them a popular choice among people who expect to find themselves in a higher tax bracket post-retirement. Knowing your tax situation today and how it will look in the years to come will determine the right approach.
Roth contributions are made with after-tax dollars, allowing the balance to grow tax-free. This feature makes them an attractive option for individuals who anticipate being in a higher tax bracket during retirement. However, understanding one’s current and future tax scenarios will dictate the best course of action.