Pre-Tax Contributions Or Roth: How to Decide?

The decision between pre-tax and Roth contributions carries significant weight, as it can have an impact on current and future tax liability and planning. Here's how to distinguish between the two and make a decision on how to contribute to your retirement.

Pre-tax vs. Roth Contributions: What's the Difference?

Pre-tax Contributions: These come from your paycheck before taxes are deducted. You pay taxes on your contributions and the earnings when you withdraw the money as a cash payment.

Roth Contributions: These are made with after-tax dollars. You pay taxes now, but both your contributions and earnings can be withdrawn tax-free if you wait until after the age of 59 1/2 and you've had the Roth source established for at least 5 years. If you withdraw a cash payment from your Roth source before the age of 59 1/2 or having the source established for at least 5 years, the earnings your investment made will be taxed.

How to Decide?

Pre-tax Contributions:

• Benefit If You're in a High Tax Bracket Now: Reduces taxable income, providing immediate tax savings.

• Expect Lower Tax Bracket in Retirement: If you anticipate being in a lower tax bracket when you retire, pre-tax contributions could result in tax savings upon withdrawal.

• Immediate Financial Relief: Your take-home pay increases as your taxable income decreases, offering more disposable income today.

Roth Contributions:

• Benefit If You Expect Higher Taxes in Retirement: Pay taxes now at your current, potentially lower, rate. Enjoy tax-free withdrawals (contributions and earnings) in retirement, ideal if you foresee a higher tax bracket later and/or are a young investor with a long time horizon to build up tax-free earnings. 

• Long-term Tax Flexibility: Provides strategic tax planning opportunities in retirement, allowing you to manage your taxable income more effectively.

Before you move forward, understand you are not required to choose one or the other, you can use a mixture of both Pre-tax and Roth to offer tax diversification, giving you options based on your financial needs in retirement.

You can make a contribution rate or type change anytime you like by logging in to your account on our website or mobile app or by contacting our help center to make the change on your behalf. Watch this helpful video to make the change on your own using our website: How to Change Your Contribution Rate - Show Me Video

In summary, your choice between pre-tax and Roth contributions should align with your current and future financial aspirations. By understanding these options and considering your individual tax circumstances, you can make an informed decision that lays the foundation for a secure and comfortable retirement. Keep in mind, the most important decision is simply to contribute and invest in your future regardless of whether you contribute pre-tax, Roth or both. 

If you need assistance, please contact us for help. 

Participant Services Team

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