Pretax or Roth Contributions: Which is Better?

Shawn Plummer

CEO, The Annuity Expert

Pretax vs. Roth contributions: What are the key differences?

It’s possible to make confident, educated judgments about your future by understanding the distinction between pretax contributions and Roth contributions. Compare the two side-by-side:

Pretax ContributionsRoth Contributions
Higher paycheck today in exchange for higher taxes in retirement.Lower paycheck today in exchange for no taxes in retirement.
Lower taxable income today by paying no taxes on retirement contributions now.Tax-free income in retirement by paying taxes on contributions today.
Pay a penalty if you begin withdrawing money before age 59½.Pay a penalty if you begin withdrawing money before age 59½.
Pay taxes in retirement on income from these plans.Don’t pay taxes in retirement on these plans.

The employer match for your Roth contributions is considered a pretax contribution since it’s funded with before-tax dollars. You’ll have to pay taxes on that amount when you withdraw it.

Is Pre Tax Or Roth Better

What is Roth Deferral?

A Roth deferral is an after-tax contribution, which means you must pay current income tax today on the deferral. Since you have already paid tax on the deferral, you won’t pay tax on it again when you receive a distribution of your Roth deferral.

If you satisfy certain IRS distribution conditions, you won’t have to pay tax on the earnings either. This means that the distribution of the Roth earnings can be tax-free.

Roth Contributions Are Better If:

  • In retirement, you anticipate your taxes to be higher. You may save money by paying a lower tax rate on your savings today.
  • You have decades to accumulate your funds. You’ll pay taxes on what you put in today, but you won’t on the profits, which may add up over time.
  • You’d rather pay taxes now than later. If you’re in your peak earning years, you may be able to afford to pay more taxes right now.
Pre Tax Vs Roth

Pretax Contributions Are Better If:

Can I contribute to both Pretax and Roth plans?

You may be able to make both pretax and Roth contributions if your plan allows it. Diversifying the timing of your tax payments now and in the future might help you balance out any subsequent changes.

Employee Pre Tax Vs Roth

After You Leave Your Job

If you leave your job, you may roll your pretax retirement plan balance into an Individual Retirement Account (IRA) or IRA annuity and your Roth money into a Roth IRA or Roth IRA annuity. You may also choose to merge your account with the retirement plan of your next employer.

Benefits of an Annuity

  • Tax-advantaged earnings
  • A retirement income for life
  • Principal protection
  • Inflation protection

Does Increasing 401k Contribution Lower Taxes?

Increasing your 401k contribution will lower your taxable income today because the money is being set aside for retirement and not in your pocket. However, your taxable income could be higher once you retire in the future.

Roth Vs Pre Tax

Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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