Traditional vs Roth 401k

Preface#

So, which one should you do? If there were a straightforward answer, the other one would never get mentioned, so it isn't a simple answer.

First, we're going to have to get on the same page about our approaches to investing.

We should look at these numbers objectively and let the math decide
...but, we're humans and no matter how object we think we are, we're fallible
So, let's just try to use good decision making and make reasonable decisions.

To quote Morgan Housel:

Aiming to be mostly reasonable works better than trying to be coldly rational.

I don't think the Google searches for the differences are particularly useful, but with some digging you can find some really good, in-depth analysis of the differences. Instead of rehashing those, I'll provide links to them below.

What This Applies To#

It applies to both:

I'll break out some of the details in those documents.

Major Differences#

Taxes#

The obvious one is:

Traditional 401k is funded with pre-tax money
Roth 401k is funded with post-tax money

The real answer#

The Roth 401k provides you more certainty over aspects of the future.

With a Roth 401k you know:

You can borrow/withdraw your contributions if an emergency comes up
You won't have to plan on paying taxes on any of the money
You won't be forced to take out withdrawals if you don't want to

But, it probably does it at the cost of future returns.

The traditional 401k will likely result in you having more money. The only thing likely to make this untrue is if you're planning on moving when you retire from a state with low state tax rates, to a state with high tax rates.

I created a 401k tab on my spreadsheet to allow me to work through this on my own. You'll have to 'File -> Make a Copy' if you want to play with the numbers

My advice#

You'll end up with more money and force yourself to be more disciplined by using the Traditional 401k (especially if you invest your Roth delta into a taxable account). Fill as many pre-tax buckets as you can.