See your employer match, take-home impact, and the cost of not maxing out.
A 401(k) employer match is the closest thing to free money in personal finance. When your employer matches 50% of your contributions up to 6% of salary, they are giving you a 50% instant return on that money — before it earns a single dollar in the market. No investment reliably returns 50% in the first year. This is why financial advisors universally agree: always contribute at least enough to capture your full employer match, even before paying down debt.
The 401(k) also offers a significant tax advantage. Traditional (pre-tax) contributions reduce your taxable income in the year you make them, and the money grows tax-deferred until withdrawal in retirement, when you pay ordinary income taxes. Roth 401(k) contributions are made after tax, but growth and qualified withdrawals are completely tax-free. Both options are more tax-efficient than a taxable brokerage account.
The core trade-off is simple: do you pay taxes now or later? With a traditional 401(k), you defer taxes until retirement, betting that your tax rate then will be lower than today. With a Roth 401(k), you pay taxes now, betting your rate in retirement will be equal to or higher than today.
You are in a high tax bracket today (22%+) and expect to be in a lower bracket in retirement. You benefit more from the immediate tax deduction. You are close to retirement and will have less time for the Roth's tax-free growth to compound.
You are early in your career and expect your income to grow. You are in a low tax bracket today (10–12%). You want tax diversification in retirement (some taxable, some tax-free). You want to leave tax-free assets to heirs.
You want to hedge your tax rate risk. Many employers now offer both options, and you can split contributions between traditional and Roth. This gives you flexibility in retirement to draw from whichever account creates the most favorable tax situation in any given year.
The 401(k) contribution limit for 2024 is $23,000 per employee ($30,500 for those 50 and older, thanks to the $7,500 catch-up contribution). These limits apply to your personal contributions only — employer match does not count against this limit. The combined limit (employee + employer) is $69,000 in 2024.
Maxing out a traditional 401(k) at $23,000/year reduces your taxable income by $23,000. At a 22% marginal rate, your federal tax bill drops by approximately $5,060. The actual cost to your take-home pay: about $18,000/year, or $1,500/month — not $23,000. The government subsidizes $5,000 of your retirement savings through the tax deduction.