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When deciding between pre-tax and Roth, it’s important to consider how each option affects your taxes and retirement strategy.

The pre-tax source allows you to make contributions with pre-tax dollars (not subject to federal income taxes), deferring taxes until withdrawn as cash later. At the point you withdraw the money as cash, you will pay income taxes on your contributions and any investment earnings. This strategy can be beneficial if you expect to be in a lower tax bracket during retirement.

On the other hand, Roth involves making contributions with after-tax dollars, enabling tax-free withdrawals in retirement. This strategy is ideal for those who anticipate being in a higher tax bracket when they retire. In other words, with Roth, you pay income taxes on your retirement plan contributions now, so you don’t have to pay them later when you withdraw as cash. Investment earnings can grow tax-free in the Roth source.

Understanding these differences can help you make informed decisions that align with your financial goals. Additionally, your retirement plan may offer you the option to split your contribution so that you can do some pre-tax and some Roth, giving you ultimate flexibility with how you want to contribute.

It’s worth noting that the Internal Revenue Service (IRS) has additional rules and stipulations on Roth distributions. Specifically, any distributions from the Roth source must be considered qualified and made after a 5-taxable year period of participation in order for investment earnings not to be taxed. Check out the IRS website for more information on this requirement and other IRS specifications related to Roth.

For more information, check out our video.

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