Smells Like Money: What Changing Felts Taught Me About Traditional vs. Roth 401(k)s
For 12 years on a paper machine, one question came up more than any other: when do we change the wet end clothing? At Stevenson, felt life ran just three to five weeks (pitiful, I know), so we faced that question constantly.
We had two options. We could shut down now, absorb the cost of new felts and lost production, and come back up running faster. Or we could push the old felts a little longer, avoid the downtime, and accept running slower in the meantime.
Neither answer was always right. We rarely made the same call twice, because the circumstances were never quite the same. Each time, we put all the facts on the table and made the best decision for that moment.
Deciding how to split your 401(k) contributions between Traditional and Roth works the same way. The tradeoff is taxes instead of felts and tons, and the key question is timing.
Traditional 401(k): Keep Running Now, Pay Later
Choosing a Traditional 401(k) is like delaying the shutdown. Your contributions go in pre-tax, which lowers your taxable income today. You get more output now, and for many working households that means less tax pressure while you're still earning.
But running on worn felts has a cost, and so does deferring taxes. When you withdraw the money in retirement, those distributions are generally taxed as ordinary income. Pre-tax accounts also come with required minimum distributions (RMDs), which currently begin in 73 and will be changing to 75 for anyone born after 1960. RMDs create a "forced flow" of taxable income, even in years when you'd rather keep things quiet.
Roth 401(k): Take the Shutdown Now, Run Faster After
Choosing a Roth 401(k) is like taking the shutdown now. You contribute after-tax dollars, so you don't get the break today. You pay the cost up front.
In exchange, qualified withdrawals in retirement are generally tax-free, as long as you're at least 59½ and have held the account for five years. Under current law, Roth 401(k)s also no longer require minimum distributions during your lifetime. Once you're up and running, you decide when the machine draws down.
Why Not Both? Blending Your Contributions
A good crew doesn't follow one fixed rule for every shutdown, and most savers don't need to go all-in on one account type either. For many people, a blended approach offers the most flexibility. It can help you:
- Manage your tax bracket today while still building tax-free savings for later
- Reduce the risk of large taxable withdrawals in retirement
- Keep more control over Medicare premium thresholds and the taxation of Social Security benefits
Having money in both "tax buckets" gives you options, the same way a well-planned shutdown schedule gives a mill room to adjust.
Making the Call: Put the Facts on the Table
Just like every felt decision at Stevenson, this one depends on your circumstances. Here are the questions we can walk through together:
- Are you currently in a relatively high or relatively low tax bracket?
- Do you expect your income to drop, stay steady, or rise in retirement?
- Are you trying to maximize take-home pay today, or maximize after-tax flexibility later?
- Do you have other tax buckets, such as brokerage accounts, Roth IRAs, or pensions, that change the picture?
Choosing between Traditional and Roth isn't about guessing where the market or tax rates are headed. It's about gathering the facts and making a sound decision for where you are today. And just like a felt schedule, it's worth revisiting as conditions change. Tax laws, plan rules, and your own situation will all shift over time, so review your strategy periodically rather than setting it and forgetting it.
This article is for educational purposes and is not tax advice. Please consult a tax professional regarding your specific situation.