401(k) vs. Roth: Which Strategy Wins Depends on One Critical Factor, Expert Explains

On a recent Earn Your Leisure episode titled “Retire Rich The Ultimate Guide to IRAs, 401(k)s, & HSAs!”, a guest delivered the line every traditional 401(k) saver needs to hear: “If you have, let’s say, $1 million in retirement and you took out that whole million dollars at one time from your 401k, you would get like $600,000 net because that is fully taxable.”

Spend two decades maxing a pre-tax 401(k), and that sentence resets your entire retirement math. The seven-figure number on your statement is partly a sizable IOU to the IRS, and knowing the difference between gross and net is where real retirement planning begins.

The Math Is Brutal

Every dollar inside a traditional 401(k) is taxed as ordinary income on the way out. Pull the entire $1 million in a single year as a single filer and you crash through every federal bracket at once, paying a higher rate on each successive slice.

Under the 2026 tax schedule, the 37% federal rate applies to income above $640,600 for a single filer. Beneath that threshold, the brackets stack in sequence: 35% on income over $256,225; 32% over $201,775; 24% over $105,700; 22% over $50,400; 12% over $12,400; and 10% on the first $12,400. The standard deduction for single filers in 2026 is $16,100, which shelters only the first slice. The bulk of that million lands squarely in the 32%, 35%, and 37% brackets.

Retirees 65 and older get additional relief. The existing age-65 add-on raises the single filer’s standard deduction by $2,050, and the One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, created a separate $6,000 senior deduction available through 2028. That senior bonus phases out at a 6% rate for those earning over $75,000 in modified AGI. Even stacking every available offset, a single lump-sum withdrawal of $1 million still faces a punishing effective rate.

Add a state with a 5% to 10% income tax and the guest’s $600,000 net estimate is roughly where you land. A combined 40% haircut on a one-shot withdrawal is the realistic base case.

The Roth side mirrors this in reverse: “If you have the Roth, if you have a million dollars hypothetically and you took out all the million dollars at one time, you would get $1 million because it’s not taxable.” Contributions go in after tax, so the IRS has no further claim on the growth.

The Single Factor That Decides Roth vs. Traditional

Whether your tax rate in retirement will be higher or lower than it is today determines which account wins. That is the entire decision, and everything else follows from it.

Consider a 35-year-old earning $120,000. Their top dollar is taxed at 24%. A $20,000 traditional 401(k) contribution saves roughly $4,800 in federal tax this year. Retiring at 65 with $1 million and drawing $80,000 annually puts their effective federal rate closer to 12% to 15% after the standard deduction and the senior deduction. In that scenario, traditional wins by a meaningful margin, because the deferred tax gets paid at a much lower rate.

A 28-year-old in California earning $70,000 tells the opposite story. Their top dollar sits in the 22% federal bracket now, but with strong income growth ahead, they will almost certainly retire at a higher marginal rate. Roth contributions lock in 22% today and shield decades of compounding from future rate exposure. For that saver, Roth wins.

The OBBBA permanently extended the TCJA ordinary income tax structure, removing much of the uncertainty that once made Roth contributions attractive as a hedge against expiring rate cuts. The top rate was set to revert to 39.6% in 2026 without that legislation. That risk is now off the table, and the brackets savers face today are set to persist indefinitely. The comparison becomes more mechanical: estimate your current marginal rate, project your retirement income, and choose accordingly.

One additional wrinkle from the OBBBA is worth noting. The law gave the 10% and 12% brackets an extra inflation adjustment for 2026, beyond standard indexing. Lower-income retirees drawing modest amounts from a traditional account benefit from slightly more room in those bottom two tiers. And for anyone considering a Roth conversion before 2028, the OBBBA senior deduction creates a four-year window where the $6,000 above-the-line offset partially cushions the conversion income, effectively reducing the net cost of moving money into a tax-free account.

The traditional 401(k) is ultimately a wager that your future self will face a lighter tax burden than your present self. For high earners currently in the 32% bracket who plan to sustain a comfortable lifestyle in retirement, that wager often loses.

A 2026 Rule Change High Earners Cannot Ignore

Starting in 2026, employees whose 2025 FICA wages from their plan-sponsoring employer exceeded $145,000 must make all catch-up contributions as Roth deferrals. Pre-tax catch-up contributions are no longer an option for these workers. If a plan does not yet allow Roth elective deferrals, affected employees cannot make catch-up contributions at all, which is pushing many employers to add Roth options to their plans before year-end.

The employee deferral limit for 2026 is $24,500 for traditional and Roth 401(k) accounts combined, up from $23,500 in 2025. Workers 50 and older can contribute an additional $8,000 in catch-up contributions. Those aged 60 through 63 qualify for the SECURE 2.0 super catch-up of $11,250 instead of the standard $8,000, if their plan allows, bringing the total employee ceiling for that age group to $35,750.

For high earners who had been using traditional catch-up contributions to compress taxable income, this rule closes that option. The upside is real: those forced Roth contributions grow tax-free, carry no withdrawal tax liability, and are not subject to required minimum distributions during the owner’s lifetime.

The Capital Gains Cliff

The same segment flagged a second tax cliff for investors holding positions outside retirement accounts. Short-term gains on assets held a year or less are taxed as ordinary income and can run as high as 37% federally, climbing further once state tax is added. Long-term gains on assets held more than a year sit at 15% for most taxpayers, or 20% at the very top. The guest put it plainly: “20% difference if you just hold long-term.”

The math on a $50,000 gain is stark. Selling on day 365 rather than day 366 can mean a five-figure difference in taxes owed. In a taxable brokerage account, the holding period is not a minor detail but a core part of the investment strategy.

State Tax and Default Strategies

State tax is the silent partner in every withdrawal decision. A retiree drawing $80,000 a year from a traditional 401(k) in New York hands over thousands more annually than the same retiree in Florida, which has no state income tax. The federal bill follows from the brackets. The state bill is determined long before the first withdrawal clears, by the retirement address chosen years earlier.

For savers who feel paralyzed by investment options, the show pointed to target date funds as a sensible default. Named by retirement year such as 2030, 2040, or 2050, these funds automatically shift from aggressive to conservative allocations as the target date approaches. They are not optimal for every situation, but they reliably outperform the alternative of leaving contributions in cash while waiting for a better moment.

What To Do This Week

1. Log into your 401(k) and check whether your plan offers a Roth option. Many do, and most participants never activate it. The 2026 contribution limit is $24,500 combined across traditional and Roth 401(k) accounts.
2. Estimate your current marginal federal bracket using the 2026 schedule, then project your taxable income in retirement. If retirement income looks meaningfully lower, traditional contributions likely serve you better. If retirement income looks higher or uncertain, route new contributions to Roth.
3. If you are 50 or older and your 2025 FICA wages from your employer exceeded $145,000, your 2026 catch-up contributions must go to Roth by law. Confirm your plan offers a Roth option now, before year-end, or you may lose the ability to make catch-up contributions entirely.
4. Run a withdrawal simulation: take your current pre-tax balance, assume a 4% annual draw, and apply your projected retirement bracket plus state tax. That figure is your real retirement income, not the gross number on your statement.
5. For any taxable brokerage positions sitting on gains, check the purchase date before selling. Crossing the one-year mark shifts the applicable rate from ordinary income to either 15% or 20%, a difference that can dwarf any short-term market consideration.

The balance on your 401(k) statement is a gross figure. Every solid retirement plan begins with the net.

Editor’s note: The mandatory Roth catch-up wage threshold was corrected from $150,000 to $145,000 in 2025 FICA wages, reflecting the IRS final regulations governing 2026 plan-year contributions. The article also adds context on the OBBBA senior deduction as a planning window for Roth conversions through 2028.

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