To Roth or Not to Roth? When Making After-Tax Contributions to a 401(k) Makes Sense

Popular media regularly exhorts readers and investors to strongly consider after-tax contributions to retirement accounts. Although the advice is sometimes caveated, the implication is that sophisticated investors use Roth accounts. However, this appears to shortchange the extraordinary value of delaying a tax payment for decades when making pre-tax contributions via Traditional retirement accounts. In this article, we look at the present value of tax payments associated with two retirees who save exactly the same amounts over time but choose different retirement vehicles, a Roth 401(k) and a Traditional 401(k). Assuming no major shifts in tax policy, we find that for the majority of taxpayers, Traditional retirement contributions ultimately save taxpayers a substantial amount of money on total tax payments across their lifetime. Our results should strongly caution media outlets and financial advisors recommending Roth retirement accounts for a broad swath of taxpayers. Unless there are significantly unfavorable changes to the tax code in the future, it is likely that only a minority of taxpayers will benefit from lower taxes when saving only through a Roth.