The 401(k)-versus-Roth-IRA question is really one question wearing two hats: do you want your tax break now, or in retirement? A traditional 401(k) contribution is deducted from this year's income, saving tax today at your marginal rate. A Roth IRA is funded with money you have already paid tax on, and then it grows and comes out completely tax-free later. Understanding the trade-off — and the 2025 limits — lets you build the right mix.
2025 contribution limits
| Account | 2025 limit (under 50) | Catch-up (50+) |
|---|---|---|
| 401(k) / 403(b) elective deferral | $23,500 | +$7,500 |
| Traditional or Roth IRA | $7,000 | +$1,000 |
Sources: IRS Notice 2024-80 (401k) and the IRA limit for 2025. Note these are separate buckets — you can contribute to both a 401(k) and an IRA in the same year. The 401(k) limit is the amount you defer; employer matching is on top of it.
Traditional (pre-tax): the break is today
Money going into a traditional 401(k) skips this year's income tax. At a 24% marginal rate, contributing $23,500 lowers your federal tax by roughly $5,600 this year. The trade: every dollar — contributions and growth — is taxed as ordinary income when you withdraw it in retirement. Traditional accounts favor you if you expect a lower tax rate in retirement than today, which is common for high earners in their peak years.
See your 401(k) tax savings →The contribution-savings tool multiplies your deferral by your marginal rate to show federal tax saved and the real cost to your paycheck.Roth: the break is later
A Roth IRA gives no deduction today, but qualified withdrawals in retirement — including decades of growth — are entirely tax-free, and Roth IRAs have no required minimum distributions during the original owner's lifetime. Roth favors you if you expect a higher or similar tax rate later, which often describes younger workers early in their careers and anyone who believes tax rates may rise.
Roth IRAs have income limits: at higher incomes your ability to contribute directly phases out and eventually disappears. High earners above the limit often use a backdoor Roth instead.
The tax-diversification case. Because nobody knows future tax rates or their own future income, holding both pre-tax and Roth money gives you a dial to turn in retirement — pulling from whichever bucket is most tax-efficient each year. Many planners suggest capturing your full employer match first, then splitting remaining savings across account types.
A simple priority order
A widely used sequence (adjust to your situation): (1) contribute at least enough to your 401(k) to get the full employer match — it is an immediate 50–100% return; (2) if eligible, max an HSA for its triple tax advantage; (3) fund a Roth or traditional IRA to the $7,000 limit; (4) go back and fill up the rest of the 401(k) toward $23,500. Whether steps 3 and 4 are Roth or traditional depends on your bracket today versus your expected bracket later.
There is no universally correct answer — only the answer that fits your current marginal rate, your expected retirement income, and your appetite for locking in today's known rates versus betting on the future. When the numbers are large, this is exactly the kind of decision worth reviewing with a CPA or fee-only advisor.