Understanding your 401(k): Traditional vs. Roth
A 401(k) is a retirement savings plan that an employer sets up for its employees. You put in part of your paycheck, and that money is invested so it can grow over time.
Many plans give you two ways to save: a traditional 401(k) and a Roth 401(k). Both come with tax advantages — the difference is when you get the tax break. A traditional 401(k) gives you the tax break now, in the year you contribute. A Roth 401(k) gives you the tax break later, when you take the money out.
You decide how to split your savings between the two. When a plan offers both, some people put money into each. That spreads out when their savings will be taxed, so they aren't locked into a single tax outcome.
Here's how each one works.
Traditional 401(k)
With a traditional 401(k), the money you contribute — and any growth from your investments — is tax-deferred. That means you don't pay income tax on it in the year you earn it. Instead, you pay tax later, when you withdraw the money in retirement.
The main feature is an upfront tax break: contributing lowers the income you're taxed on for that year, so your tax bill today can be smaller.
Roth 401(k)
With a Roth 401(k), you contribute after-tax dollars — money you've already paid income tax on. Because you paid the tax going in, qualified withdrawals in retirement come out tax-free, including the growth.
For a Roth withdrawal to be fully tax-free ("qualified"), two things generally need to be true: the account has been open for at least five years, and you're at least 59½ when you take the money out.
One thing worth understanding about the trade-off: because you pay the tax now instead of later, a Roth can matter most when your tax rate today is lower than you expect it to be in the future. That's often the case earlier in a career, when income tends to be lower.
How employer matching works
Some employers add money to your 401(k) based on what you contribute. This is called a match, and it applies to whichever account type your plan offers. Two common structures are:
- Dollar-for-dollar match: the employer adds $1 for every $1 you contribute, up to a set percentage of your pay.
- Partial match: the employer adds a portion of each dollar you contribute — for example, $0.50 for every $1, up to a set percentage of your pay.
Not every employer offers a match, and the exact terms vary from plan to plan. Your plan's documents spell out what yours does.
Contribution limits for 2026
The IRS sets a yearly cap on how much you can contribute to a 401(k). These limits apply to traditional and Roth 401(k) contributions combined.
- Standard limit: up to $24,500 in 2026.
- Age 50 and older: an extra $8,000 catch-up contribution, for up to $32,500 total.
- Ages 60 to 63: a higher catch-up of $11,250 (in place of the $8,000), for up to $35,750 total. This higher catch-up comes from a rule in the SECURE 2.0 Act.
A catch-up contribution is simply extra room the IRS allows once you reach certain ages, so you can save more as retirement gets closer.
This article is for educational purposes only. It is general information, not financial, investment, or tax advice, and reading it does not create any advisory or professional relationship. Retirement and tax rules have details that depend on your own situation, and they can change. For guidance specific to you, consider speaking with a qualified professional.
Sources
- Internal Revenue Service, "401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500" — https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
- U.S. Bank, "What is a 401(k)?" — https://www.usbank.com/wealth-management.html
- Investor.gov, "Traditional and Roth 401(k) plans" — https://www.investor.gov