Roth or Traditional? The 401(k) Decision Most People Get Wrong.

Most people choose between a Roth and traditional 401(k) based on a vague sense of which sounds better. Roth sounds modern. Traditional sounds safe. Neither of those is a reason.

The actual decision is straightforward in principle: if your tax rate today is higher than your expected tax rate in retirement, the traditional 401(k) wins. You defer income at today's high rate and pay tax later at a lower one. If your tax rate in retirement will be higher than it is now – or equal – the Roth wins. You pay tax today and never pay it again on that money.

Why It's Harder Than It Sounds

The problem is that nobody knows what their retirement tax rate will be. It depends on Social Security income, required minimum distributions from traditional accounts, other taxable income, and where tax rates land in 20 or 30 years. All of those are unknowns.

What you can control is the math today. If you're in your peak earning years, your marginal rate is probably near its lifetime high. Every dollar contributed to a traditional 401(k) is a dollar deducted from income at that high rate. That's a significant upfront advantage.

The RMD Problem

One argument for the Roth that's often overlooked: required minimum distributions. Starting at age 73, traditional retirement accounts require you to withdraw a minimum amount each year, whether you need the money or not. Those withdrawals are taxable income. If you've spent decades accumulating in a traditional 401(k), RMDs can push you into a higher bracket in retirement than you anticipated – potentially making Social Security benefits partially taxable and creating a cascade of tax consequences.

Roth accounts have no RMDs during the owner's lifetime. The money continues to compound tax-free for as long as you choose to leave it.

The Roth Conversion Bridge

For many people, the optimal strategy isn't one or the other – it's both, deployed at different times. Contributing to a traditional 401(k) during peak earning years, then converting portions of it to Roth during lower-income years in early retirement, captures the deduction now and the tax-free compounding later. That window – between retirement and when RMDs begin – is one of the most valuable tax planning opportunities available. Almost nobody uses it deliberately.

At STQ, the contribution strategy and conversion pathway are planned together, not separately. The goal is to minimize tax across the full arc of your financial life – not just this year's return.