If you have to choose between a traditional or Roth deferral, you will have to decide whether it’s better to get a tax break now or in retirement. A traditional deferral lowers your taxable income today, while a Roth deferral offers tax-free withdrawals later. A financial advisor can work with you to determine which is a better fit for your current tax bracket, future income and retirement plans.
What Is an Employee Deferral?
When you make a contribution to a retirement plan, like a 401(k), with pre-tax dollars that’s called an employee deferral. Because these contributions are pre-tax, they reduce your taxable income for the year, which may lower your tax bill. The account invests these funds and they grow tax-deferred until you begin withdrawing them in retirement.
The IRS taxes withdrawals from an employee deferral account as ordinary income. If you take distributions before age 59.5, you may also face a 10% early withdrawal penalty unless an exception applies.
For example, suppose you earn $80,000 per year and contribute $10,000 to a traditional 401(k) through employee deferrals. For tax purposes, it would reduce your taxable income to $70,000. This could place you in a lower tax bracket and provide significant short-term tax savings.
When comparing an employee deferral with a Roth deferral, this traditional approach is often preferred by individuals who expect to be in a lower tax bracket in retirement than they are today.
What Is a Roth Deferral?

A Roth deferral allows you to contribute to your retirement plan using after-tax dollars. That means you won’t get a tax break on the contributions today, but your money can grow tax-free. Qualified withdrawals in retirement are also tax-free.
Like employee deferrals, Roth contributions are typically made through payroll deductions into your 401(k) or similar retirement plan. The key difference lies in the timing of when you pay taxes.
Using the same amount from the employee deferral example, if you earn $80,000 and contribute $10,000 to a Roth 401(k), your taxable income would remain $80,000 for the year. But when you retire and begin taking withdrawals, that $10,000 (plus any earnings) could be withdrawn tax-free, provided that you meet the age and holding requirements.
Keeping this in mind, Roth deferrals can be especially advantageous for younger earners, those who expect to be in a higher tax bracket later in life, or anyone looking to minimize their tax liability in retirement.
Employee Deferral vs. Roth Deferral
The main difference between an employee deferral and a Roth deferral lies in the tax treatment of contributions and withdrawals. Here’s a table comparing key features:
Feature | Employee Deferral (Traditional) | Roth Deferral |
Contribution Type | Pre-tax | After-tax |
Tax Deduction | Yes, lowers current taxable income | No, taxed in the year earned |
Growth | Tax-deferred | Tax-free |
Withdrawals in Retirement | Taxable | Tax-free (qualified distributions) |
Ideal For | Higher earners now, lower in retirement | Younger or growing earners |
If you have to choose between a traditional employee deferral and a Roth deferral, think about your current tax rate and what it could be in retirement. A Roth deferral may be better if your income is lower now and likely to rise. A traditional deferral, on the other hand, might be better if you’re earning more now and expect a lower income later.
How to Choose the Right Option for You
Choosing between an employee deferral and a Roth deferral means thinking about your current finances, future plans, and when you expect to retire. Here are a few questions to help you decide:
- What is your current tax bracket? If you’re in a high tax bracket, deferring taxes through traditional employee deferrals could offer meaningful savings.
- Do you expect to be in a higher or lower tax bracket in retirement? Roth deferrals make more sense if you expect higher taxes later.
- How long until you retire? The longer your money can grow, the more beneficial tax-free compounding can be with Roth accounts.
- Do you value flexibility? Roth deferrals don’t have required minimum distributions (RMDs), which can give you more control over your retirement income.
Some financial professionals suggest splitting your contributions between traditional and Roth deferrals. This can give you tax flexibility and help manage future tax changes. Reviewing your plan each year can also help keep it in line with your long-term goals.
Bottom Line

Each option has unique advantages depending on your income level, tax outlook and future financial needs. Traditional employee deferrals offer immediate tax savings, while Roth deferrals provide tax-free income in retirement. Ultimately, the best choice depends on your personal financial situation and retirement goals.
Retirement Plan Tips
- A financial advisor can help you determine when is the best time to retire and manage key factors to maximize your benefits. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Mandatory distributions from a tax-deferred retirement account can complicate your post-retirement tax planning. Use SmartAsset’s RMD calculator to see how much your required minimum distributions will be.
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