The Roth vs. traditional 401(k) decision is fundamental to retirement planning. For W-2 employees, the choice is usually straightforward: higher bracket now means traditional, lower bracket means Roth.
For business owners, it’s more nuanced. You control your own salary, which affects your current bracket. Your income fluctuates year to year. And starting in 2026, SECURE 2.0 mandates Roth treatment for catch-up contributions if you’re a high earner.
This guide covers the decision framework, 2026 limits, and business owner-specific considerations that generic advice misses.
Should you choose a Roth 401(k) or Traditional 401(k)?
Choose Traditional 401(k) if you’re in a high tax bracket now (32%+) and expect lower income in retirement, or if you need the current-year tax deduction to reduce estimated payments. Choose Roth 401(k) if you expect tax rates to rise, want tax-free withdrawals for flexibility, or are younger with decades of tax-free growth ahead. For 2026, contribution limits are $24,500 ($32,500 with catch-up, $35,750 for ages 60-63). Starting in 2026, high earners ($150,000+ in prior-year FICA wages) must make catch-up contributions as Roth. Many business owners benefit from a mix of both.
Key Takeaways
- Traditional = tax deduction now, taxable later — Contributions reduce current taxable income; withdrawals taxed as ordinary income
- Roth = no deduction now, tax-free later — Contributions don’t reduce current taxes; qualified withdrawals are 100% tax-free
- 2026 contribution limit: $24,500 — Plus $8,000 catch-up (50+) or $11,250 enhanced catch-up (ages 60-63)
- SECURE 2.0 mandatory Roth catch-up — If you earned $150,000+ FICA wages in 2025, 2026 catch-up must be Roth
- Employer contributions are always pre-tax — Employer match/profit sharing goes to traditional regardless of your deferral type
- You can do both — Split contributions between Roth and traditional within the same plan
Table of Contents
Side-by-Side Comparison
| Feature | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Tax treatment now | Deductible – reduces taxable income | Not deductible – no current tax benefit |
| Tax treatment later | Withdrawals taxed as ordinary income | Qualified withdrawals tax-free |
| 2026 employee limit | $24,500 | $24,500 |
| Catch-up (50-59, 64+) | $8,000 | $8,000 |
| Enhanced catch-up (60-63) | $11,250 | $11,250 |
| Required minimum distributions | Yes, starting at age 73 | Yes, but can roll to Roth IRA to avoid |
| Employer contributions | Pre-tax (goes to traditional) | Pre-tax (goes to traditional) |
| Income limits | None | None |
| Best when | High bracket now, lower later | Lower bracket now, higher later (or same) |
Key insight: The $24,500 limit is combined. You can split it (e.g., $12,000 traditional + $12,500 Roth) but can’t exceed $24,500 total in employee deferrals.
2026 Contribution Limits
Employee Deferral Limits
| Age Group | 2026 Limit | Notes |
|---|---|---|
| Under 50 | $24,500 | Combined traditional + Roth |
| 50-59 | $32,500 | $24,500 + $8,000 catch-up |
| 60-63 | $35,750 | $24,500 + $11,250 enhanced catch-up |
| 64+ | $32,500 | Back to standard catch-up |
Total 401(k) Limits (Section 415(c))
| Age Group | 2026 Limit | What’s Included |
|---|---|---|
| Under 50 | $72,000 | Employee deferrals + employer contributions + after-tax |
| 50-59 | $80,000 | Above + $8,000 catch-up |
| 60-63 | $83,250 | Above + $11,250 enhanced catch-up |
| 64+ | $80,000 | Back to standard catch-up |
How Limits Work
The employee deferral ($24,500) applies to YOUR contributions only. Employer match and profit sharing are additional, up to the 415(c) limit. After-tax contributions (for Mega Backdoor Roth) fill any remaining gap.
See our after-tax 401(k) contributions guide for details on maximizing beyond the deferral limit.
When Traditional 401(k) Makes Sense
You’re in a High Tax Bracket Now
If you’re currently in the 32%, 35%, or 37% bracket and expect to be in a lower bracket in retirement, traditional saves tax at the higher rate.
Example:
- Current bracket: 32%
- $24,500 traditional contribution saves $7,840 in taxes today
- Withdrawal at 24% bracket in retirement costs $5,880 in taxes later
- Net benefit: $1,960 saved (plus decades of deferred tax on growth)
You Need the Deduction for Estimated Payments
Business owners often owe large estimated payments throughout the year. Traditional 401(k) contributions reduce your taxable income, which can:
- Lower your quarterly estimated payments
- Keep you in a lower bracket for other planning
- Offset a high-K-1 year
See our S-Corp tax planning strategies for how 401(k) contributions fit into overall tax planning.
State Tax Considerations
If you live in a high-tax state now (California, New York, New Jersey) but plan to retire in a no-tax state (Texas, Florida, Nevada), traditional contributions let you:
- Deduct at California’s 13%+ rate
- Withdraw at Florida’s 0% rate
- Capture both federal and state tax savings
You Have Large K-1 Income This Year
Partnership and S-Corp income varies. In a year when K-1 pushes you into higher brackets, traditional contributions offset some of that income.
Check out our partnership tax planning strategies for more on coordinating K-1 income with retirement contributions.
When Roth 401(k) Makes Sense
You Want to Lock in Today’s Rates
TCJA rates are now permanent under OBBBA, but that doesn’t mean rates can’t change. Congress can always pass new tax legislation. Today’s brackets (top rate 37%) are historically favorable compared to pre-TCJA levels (when the top rate was 39.6%).
If future legislation increases rates, today’s Roth contributions at 32% beat future traditional withdrawals at higher rates. Roth locks in today’s known rates regardless of what Congress does later.
You’re Younger with Decades of Growth
The value of tax-free growth compounds over time. A 35-year-old’s Roth contributions have 30+ years to grow before withdrawal.
Example:
- $24,500 Roth contribution at age 35
- 7% average growth over 30 years
- Value at 65: ~$186,000
- Tax on withdrawal: $0
That same $24,500 as traditional, growing to $186,000, would owe ~$45,000 in taxes at 24%. The tax-free growth advantage often outweighs the current-year deduction for younger savers.
Estate Planning Goals
Roth 401(k) assets (rolled to Roth IRA) pass to heirs tax-free. Beneficiaries still have the 10-year distribution rule, but they pay no income tax on those withdrawals.
Traditional accounts burden heirs with ordinary income tax—potentially at high rates if they’re in peak earning years when they inherit.
You Want Retirement Income Flexibility
Having both Roth and traditional balances in retirement gives you control:
- Low-income years: withdraw from traditional (fill low brackets)
- High-income years: withdraw from Roth (no tax impact)
- Manage Medicare IRMAA thresholds
- Control Social Security taxation
- Stay in favorable capital gains brackets
SECURE 2.0 Forced Your Hand
If catch-up contributions must be Roth anyway (see below), you might embrace Roth more broadly for the flexibility. You’ll have some Roth—might as well lean into it.
SECURE 2.0 Changes for 2026
Mandatory Roth Catch-Up for High Earners
The rule: If you earned $150,000 or more in FICA wages in 2025 from the employer sponsoring your 401(k), your 2026 catch-up contributions ($8,000 or $11,250) must be Roth. You don’t have a choice.
For S-Corp owners: Your W-2 wages from the S-Corp count toward the $150,000 threshold. If your reasonable salary exceeds $150,000, this rule applies to your catch-up contributions.
See our S-Corp reasonable compensation guide for how salary planning intersects with this rule.
Example:
- 2025 S-Corp salary: $160,000
- You’re age 52 in 2026
- Catch-up contribution: $8,000
- Must be contributed as Roth (no choice)
- Regular deferral ($24,500): can still be traditional or Roth
Enhanced Catch-Up for Ages 60-63
If you turn 60, 61, 62, or 63 during 2026, your catch-up limit increases to $11,250 (vs. $8,000). This is in addition to the $24,500 regular limit.
Total potential for ages 60-63: $35,750 in employee deferrals.
For business owners in this age range, this represents a significant acceleration opportunity. Whether you choose traditional or Roth (subject to the mandatory Roth rule if applicable), it’s more room to build retirement wealth.
What Doesn’t Change
- Regular deferrals ($24,500) can still be traditional or Roth—your choice
- Employer contributions remain pre-tax regardless of your election
- No income limits apply to 401(k) contributions (unlike Roth IRA)
Business Owner Considerations
Coordinating with S-Corp Reasonable Salary
Your salary determines your 401(k) contribution ceiling. Higher salary means more 401(k) room—but also more payroll tax (15.3% on the first ~$168,600 in 2026).
Sweet spot thinking:
- Salary high enough to maximize desired 401(k) contributions
- But not so high you’re paying unnecessary payroll tax
- The optimization requires looking at your total tax picture
Our S-Corp reasonable compensation guide breaks down the calculation.
The “Both” Strategy
You don’t have to choose exclusively. Many business owners split contributions between traditional and Roth.
Example approach:
- $12,500 traditional (current deduction to manage estimated payments)
- $12,000 Roth (tax diversification, hedge against rate increases)
- Adjust the split based on current-year income
Adding Mega Backdoor Roth
If your plan allows after-tax contributions plus in-plan Roth conversion, you can get even more into Roth accounts—beyond the $24,500 deferral limit.
This is a separate decision from Roth vs. traditional deferrals, but it’s part of the overall Roth accumulation strategy.
Year-by-Year Flexibility
Review the Roth/traditional split each year as part of your quarterly tax advisory process.
- High K-1 year → lean traditional (get the deduction)
- Low income year → lean Roth (lock in low rates)
- Uncertain year → split 50/50 for balance
Frequently Asked Questions
Can I contribute to both Roth and traditional 401(k) in the same year?
Yes. You can split your employee deferrals between Roth and traditional, as long as the combined total doesn’t exceed $24,500 (plus catch-up if eligible). Most plans let you specify a percentage or dollar amount for each type.
Does my employer match go to Roth if I make Roth contributions?
No. Employer contributions (match and profit sharing) are always pre-tax, regardless of whether your deferrals are Roth or traditional. They go into the traditional portion of your 401(k) account.
What’s the income limit for Roth 401(k) contributions?
There is no income limit for Roth 401(k) contributions. Unlike Roth IRA contributions, which phase out at high incomes, you can contribute to a Roth 401(k) regardless of how much you earn.
Do Roth 401(k)s have required minimum distributions?
Yes, Roth 401(k)s have RMDs starting at age 73. However, you can roll your Roth 401(k) to a Roth IRA, which has no RMDs for the original owner. This is a common strategy to maintain tax-free growth indefinitely.
Should I max out traditional first, then do backdoor Roth IRA?
It depends on your situation. If you’re in a very high bracket (35%+) and expect significantly lower retirement income, maxing traditional 401(k) and doing backdoor Roth IRA for additional Roth exposure can work well. But if you want more Roth overall, splitting your 401(k) contributions may be better.
How does the SECURE 2.0 catch-up rule affect me if I’m a business owner?
If your S-Corp pays you W-2 wages of $150,000+ in 2025, your 2026 catch-up contributions must be Roth. You can’t choose traditional for the catch-up portion. This effectively forces high-earning business owners into partial Roth.
Is the 60-63 enhanced catch-up automatic?
Your plan must be updated to allow it, but most large providers are implementing this. If you have a solo 401(k), check with your provider (Fidelity, Schwab, etc.) that their plan document supports the enhanced catch-up for ages 60-63.
Can I change my Roth/traditional split mid-year?
Usually, yes. Most plans allow you to change your contribution elections at any time (or at least quarterly). Check with your plan administrator. This gives you flexibility if your income picture changes during the year.
Making Your Decision
Quick Decision Framework
Choose Traditional if:
- You’re in the 32%+ bracket now
- You expect significantly lower income in retirement
- You need the current-year deduction for cash flow or estimated payments
- You’re moving from a high-tax to no-tax state at retirement
Choose Roth if:
- You expect tax rates to rise
- You’re in a lower bracket now than you expect in retirement
- You want tax-free flexibility in retirement
- Estate planning (tax-free inheritance) is important
- SECURE 2.0 requires it for your catch-up contributions
Do Both if:
- You want tax diversification
- Your income fluctuates year to year
- You’re unsure about future tax rates
Get Your Strategy Right
Not sure which is right for your situation? Schedule a tax planning consultation and we’ll analyze your current income, expected retirement scenario, and SECURE 2.0 impact to recommend the optimal strategy.
Our tax advisory services include year-round retirement strategy as part of comprehensive tax planning. For a complete view of retirement tax strategies, see the Retirement Tax Planning Hub.
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