Roth vs. Pre-Tax: Choosing the Right Bucket for Retirement Dollars

When saving for retirement individuals may have two different ways to contribute: Roth and Pre-Tax (also known as Traditional). Both contribution methods can be great tools – the key is understanding how they work and when each one makes the most sense.

The Core Difference: Timing of Taxation

• Pre-Tax (Traditional) Contributions: You contribute now and get a tax deduction today, but pay income taxes later when you withdraw the money.

  • For example, if an individual contributes $10,000 today on a pre-tax basis, this amount is excluded from taxable income. If that same $10,000 grows to $50,000 by the time the individual retires, all $50,000 would be subject to ordinary income tax.

• Roth Contributions: You contribute after-tax dollars, but your money grows tax-free. In retirement, withdrawals are also tax-free as long as the appropriate rules have been met.

  • For example, if an individual contributes $10,000 today on a Roth basis, this amount still gets included in taxable income. If that same $10,000 grows to $50,000 by the time the individual retires, all $50,000 could be withdrawn tax-free, assuming the appropriate rules are met.

When Might One Be Better Than the Other?

Roth May be better if:

• Are early in your career

• Expect to have HIGHER income years in the future, especially during retirement

• Anticipate HIGHER future tax brackets (due to tax law change, moving to a higher income state, etc.)

Pre-Tax (Traditional) May be better if:

• Are in your peak earning years

• Expect to have LOWER income years in the future, especially during retirement

• Anticipate LOWER future tax brackets (due to tax law change, moving to a no-income tax state)

There’s no one-size-fits-all answer – the right choice depends on your income, goals, and expectations about the future. The truth is you don’t have to choose just one. A blend of both Roth and Pre-Tax retirement accounts allows flexibility in retirement and often results in the most successful retirements. Not sure which contribution strategy is right for you? That’s exactly where strategic financial planning can assist.