Dec 14, 2025
If you’ve been wondering whether to save for retirement by making traditional or Roth contributions, it’s not necessarily a straightforward decision.
A traditional 401(k) gives you a tax break in the year you contribute by reducing your taxable income. Once you turn 59½, you can make penalty-free withdrawals, but those withdrawals are taxed as ordinary income. So you’ll owe income tax on future withdrawals — your contributions as well as any growth — in retirement.
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Contributions to a Roth 401(k) are made with after-tax dollars, so you don’t get a tax break for the year, but qualified withdrawals are tax-free in retirement (so long as you’re over 59½ and the account has been open at least five years).
Some high earners contributing to a traditional 401(k) may consider converting it into a Roth 401(k) — say, if they earn too much to qualify for a Roth IRA (a modified adjusted gross income of more than $150,000 for a single filer) or want to make higher catch-up contributions.
Marginal vs. effective tax rate
In their retirement planning, many people only consider their current versus future marginal tax rate. This is the percentage at which your last dollar of taxable income is taxed. The U.S. has a progressive federal tax system, meaning higher incomes are taxed at higher rates, so that’s why the last dollar matters.
Unlike your marginal tax rate, your effective tax rate is the percentage at which your total earned and unearned income is taxed.
Looking ahead to retirement, you may assume you’ll be in a lower tax bracket since you won’t be working anymore. But understanding the difference between marginal and effective tax rates could help when making decisions about traditional vs. Roth contributions.
“People always talk in marginal rates, but lived experiences are [your] effective rates,” Cody Garrett, a certified financial planner and founder of Measure Twice Planners in Houston, told CNBC (1), adding that your effective rate in retirement could be lower than you expect.
In a LinkedIn post (2), Garrett shared an example of how this works. Grace, a 50-year-old single taxpayer, has a gross income of $200,000. After her standard deduction of $15,750 for 2025, she now has a taxable income of $184,250.
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In this case, her marginal tax rate is 24%. But her effective tax rate is 18.5% (total tax divided by gross income). She’d need a gross income above $326,900 to reach an effective tax rate of 24%.
However, “it can be complicated to quantify the value of potentially tax-free withdrawals versus a current tax deferral if you don’t know what your income will be in the future or what your tax rate will be,” according to Fidelity (3).
“If you expect your marginal tax rate to be at least as high in retirement as it is currently — which would apply to many younger participants who anticipate growing incomes over time — the Roth option could work in your favor over the long term," Andrew Bachman, director of tax and retirement income on the financial solutions team at Fidelity.
“This also sometimes applies to those who plan to move in retirement from a low-tax state to a high-tax state, say Texas to California,” he said.
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Consider where you live
Where you plan to retire could also factor into this decision. Aside from paying income tax on your taxable income, some states may tax your pension, Social Security retirement benefit and/or 401(k) and IRA distributions. On the other hand, a few states have no personal income tax (whether you’re retired or not) and some have a flat rate.
If you plan to age in place in your home or stay in your community, understanding how your state taxes retirement income can be a factor in your 401(k) decisions. If you were considering a move to a different state, you may want to look into the tax implications specifically for retirement income.
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For example, seven states — California, Connecticut, Maine, Minnesota, Nebraska, Rhode Island and Vermont — have minimal to no retirement income tax benefits, making them some of the worst states to retire (from a tax perspective).
On the other hand, another seven states — Alaska, Florida, Georgia, Mississippi, Nevada, South Dakota and Wyoming — are tax-friendly to retirees, either offering no state income tax, no tax on retirement income and/or a deduction on retirement income.
Of course, taxes aren’t the only consideration in where you choose to retire, but they could impact your retirement savings decisions, such as whether to contribute to a traditional or Roth 401(k), or whether to roll a traditional 401(k) over into a Roth account.
When you want to retire has a role to play, too. For example, pre-tax savings could allow for Roth IRA conversions in early retirement, which would allow you to potentially take advantage of a lower tax bracket before you receive Social Security income and before required minimum distributions (RMDs) are required.
You may want to consider working with a financial advisor, since there are myriad factors to consider.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
CNBC (1); LinkedIn (2); Fidelity (3).
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Vawn Himmelsbach is a veteran journalist who has been covering tech, business, finance and travel for the past three decades. Her work has been featured in publications such as The Globe and Mail, Toronto Star, National Post, Metro News, Canadian Geographic, Zoomer, CAA Magazine, Travelweek, Explore Magazine, Flare and Consumer Reports, to name a few.
