Explaining Roth vs. Traditional 401(k) to Your Team

Many employees participate in their company’s 401(k) plan without fully understanding the difference between Roth and Traditional 401(k) contributions. As an employer, providing clear education can help employees make informed choices that suit their long-term financial goals.

At AdvisorShare Health Management, we guide organizations in communicating retirement plan options effectively, ensuring employees maximize their benefits. In this blog, we’ll break down Roth vs. Traditional 401(k) in simple terms, so you can explain it clearly to your team.

1. What Is a Traditional 401(k)?

A Traditional 401(k) allows employees to contribute pre-tax dollars, which reduces their taxable income for the year. Key features include:

• Tax-deferred growth: Investments grow tax-free until withdrawal

• Taxes paid in retirement: Distributions are taxed as ordinary income

• Best for employees: Who expect to be in a lower tax bracket at retirement

Example:
If an employee earns $70,000 and contributes $7,000 to a Traditional 401(k), their taxable income drops to $63,000 for the year.

2. What Is a Roth 401(k)?

A Roth 401(k) allows employees to contribute after-tax dollars, meaning they pay income taxes now but withdrawals in retirement are tax-free, provided IRS rules are met.

• No tax deduction today

• Tax-free withdrawals later

• Best for employees: Who expect to be in the same or higher tax bracket in retirement

Example:
If an employee contributes $7,000 to a Roth 401(k), they still pay taxes on the full $70,000 now, but their withdrawals in retirement are tax-free.

3. Key Differences Between Roth and Traditional 401(k)

Employees often find it helpful to see side-by-side comparisons like this during orientation sessions.

4. Helping Employees Choose the Right Option

Different employees have different needs. Some may benefit from a mixed strategy, splitting contributions between Roth and Traditional.

Tips for employers:

• Offer simple decision guides and calculators

• Host financial wellness workshops

• Encourage employees to speak with a financial advisor

AdvisorShare Health Management integrates retirement education into financial wellness programs, helping employees select the right path for their unique situation.

5. Communicating Roth vs. Traditional 401(k) Effectively

To ensure employees understand their options:

1. Use simple, real-life examples rather than jargon

2. Provide visual aids like charts, info graphics, and recorded webinars

3. Highlight tax implications with illustrative scenarios

4. Emphasize the benefit of starting early to maximize compounding

When employees are informed, they’re more likely to contribute confidently—boosting overall plan participation and retirement readiness.

Conclusion

Clear communication about Roth vs. Traditional 401(k) contributions helps employees make smarter decisions and feel empowered about their retirement savings.

At AdvisorShare Health Management, we specialize in simplifying complex retirement concepts for employees, increasing participation, and improving plan performance for employers.