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 watching the balance climb, and that sentence should reset your retirement math. The seven-figure number on your statement is partly a sizable IOU to the IRS.

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.

Under the 2026 tax schedule, the top 37% federal rate applies to income above $640,600 for a single filer. The lower slices stack underneath: 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 means almost the entire million remains taxable, with the bulk landing squarely in the 32%, 35%, and 37% brackets.

Retirees 65 and older can claim an additional standard deduction of $2,050 and, under the One Big Beautiful Bill Act (OBBBA) signed on July 4, 2025, a separate $6,000 senior deduction available through 2028. That senior bonus phases out at a 6% rate for those earning over $75,000. Even stacking all those offsets, 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.” You paid the tax on contributions going in, 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 whole decision, and everything else is detail.

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 new senior deduction. In that scenario, traditional wins by a meaningful margin.

A 28-year-old in California earning $70,000, with their top dollar in the 22% bracket and strong income growth ahead, will likely 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, which removes much of the uncertainty that once made Roth contributions attractive as a hedge against expiring rate cuts. The top rate would have reverted to 39.6% in 2026 without the legislation. That risk is now off the table, and the brackets savers face today are set to remain. The comparison therefore becomes more mechanical: estimate your current marginal rate, estimate your retirement income, and choose accordingly.

Worth noting, the OBBBA also gave the 10% and 12% brackets an extra inflation bump for 2026, beyond standard indexing. That means lower-income retirees drawing modest amounts from a traditional account benefit from slightly more room in the bottom two tiers.

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 maintain a comfortable lifestyle in retirement, that wager often loses.

A 2026 Rule Change High Earners Cannot Ignore

Starting in 2026, employees whose prior-year FICA wages exceeded $150,000 must make all catch-up contributions as Roth deferrals. Pre-tax catch-up contributions are no longer permitted for these workers. If a plan does not 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.

The employee deferral limit for 2026 is $24,500 for both traditional and Roth 401(k) accounts combined, up from $23,500 in 2025. Workers 50 and older can contribute an additional $8,000. 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, which brings 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, the new rule closes that option permanently. The upside: those forced Roth contributions grow tax-free and carry no tax liability on withdrawal.

The Capital Gains Cliff

The same segment flagged a second tax cliff for investors outside retirement accounts. Short-term gains on positions held a year or less are taxed as ordinary income and can run as high as 37% federally, or into the upper 30s once state tax layers on. Long-term gains on positions held more than a year typically sit at 15%, or 20% at the top end. The guest’s framing was direct: “20% difference if you just hold long-term.”

Selling on day 365 versus day 366 of a $50,000 gain is a five-figure decision. In a taxable brokerage account, the calendar is part of the investment strategy, not an afterthought.

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 a choice made long before the first withdrawal clears.

For savers paralyzed by investment options, the show pointed to target date funds, named by retirement year like 2030, 2040, or 2050. These funds automatically rebalance from aggressive to conservative allocations as the target date approaches. They are not optimal for every saver, but they beat sitting in cash 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 switch it on. 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 estimate your taxable income in retirement. If retirement income looks 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 earned more than $150,000 in FICA wages in 2025, your 2026 catch-up contributions must go to Roth by law. Confirm your plan offers a Roth option 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 number is your real retirement income, not the gross figure on your statement.
5. For any taxable brokerage positions sitting on gains, check the purchase date before selling. Crossing the one-year mark changes 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 meaningful retirement plan starts with the net.

Editor’s note: This article was updated to note that the One Big Beautiful Bill Act was signed on July 4, 2025, and that without it the top federal rate would have reverted to 39.6% in 2026. The update also adds context that the OBBBA gave the 10% and 12% tax brackets an additional inflation adjustment for 2026, modestly reducing the tax burden for lower-income retirees drawing from traditional accounts. The 2026 super catch-up ceiling of $11,250 for workers aged 60 through 63 and the resulting $35,750 employee contribution ceiling for that group were also clarified.

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