Key Takeaways
- Pre-tax means you get a tax break now but pay taxes later in retirement, while Roth means you pay taxes now and withdraw tax-free later.
- Roth accounts are often better for younger or lower-income earners who have decades of tax-free growth ahead.
- Pre-tax contributions are attractive for high earners who benefit more from immediate tax deductions.
- If tax rates stay the same over your lifetime, both options often produce similar results in the end.
- Many people choose to split contributions between pre-tax and Roth to hedge against future tax uncertainty.
When you start a new job or open a retirement account, your company probably asks you a question that makes your eyes glaze over: “Do you want to make pre-tax or Roth contributions?”
Don’t worry – this actually matters a lot, but it’s not as complicated as it sounds. To get started, check out resources like IRA Club. Let me break it down in a way that makes sense first.
The Simple Version: Pay Now or Pay Later
Here’s the whole thing in one sentence: Do you want to pay taxes now, or pay taxes later?
That’s really it. But let’s dig a little deeper.
Pre-tax (also called Traditional): You put money into your 401(k) before the government takes taxes out. So your paycheck is smaller, but your tax bill at the end of the year is lower. When you retire and start taking money out, that’s when you pay taxes on everything – all the money you put in AND all the money it earned.
Roth: You put money in after taxes are taken out. Your paycheck doesn’t get a break, and you pay taxes on it right now. But here’s the cool part – when you retire, you take money out and the government doesn’t touch it. No taxes ever. Not on what you put in, and not on what it earned.
Think of it like choosing between a discount today or a discount later.
Is Roth Pre or Post Tax? (Yes, This Is Actually Asked A Lot)
Roth is 100% after-tax. No exceptions. You already paid your taxes on that money before it goes into the account. If someone tells you differently, they’re wrong.
Who Should Pick Which One?
This is where it gets real. Let’s talk about different situations:
If You’re Young (Like in Your 20s or 30s)
Roth is usually your friend. Here’s why: you’ve got 30, 40, or even 50 years before you retire. That’s a really long time for your money to grow without paying taxes on it.
Let’s say you throw $5,000 into a Roth when you’re 25. By the time you’re 65, that could be worth way more – like $500,000 or more – and you don’t pay a single dollar in taxes on all those earnings.
Compare that to pre-tax: you’d get a tiny tax break now (maybe $1,200) but you’d pay taxes on all $500,000 later. Which sounds better?
This actually came up on Reddit where a 27-year-old making $100k in Los Angeles asked if he should do Roth or Traditional 401(k). He already had a Roth IRA maxed out, so he was trying to figure out if he should split his 401(k) contributions or do all Roth. The discussion was real: yes, the tax break he’d get right now was good, but with 30+ years until retirement and the expectation he’d make more money later, the Roth option looked better for his long-term plan.
If You Make A Lot of Money Right Now
If you’re earning a really good salary – like $150,000 or more a year – pre-tax contributions are pretty attractive. Here’s the thinking: you’re probably going to make less money in retirement than you do now. So it makes sense to pay taxes on your retirement money when you’re making less, not when you’re making a ton.
Plus, the tax break you get right now is bigger when you earn more. If you’re in a high tax bracket, every dollar you put into pre-tax savings saves you maybe 32 cents. That adds up.
If You Don’t Make That Much Money
If you’re in the 22% or 24% tax bracket (most regular people), Roth makes a lot of sense. You’re paying taxes at a pretty low rate right now. Who knows? By the time you retire, taxes might be higher. Why not lock in these lower rates?
If You’re Close to Retirement
If you’re within 10 years of retirement, pre-tax might be better. You’re still earning good money, so the tax break helps now. You don’t have decades for that money to grow anyway.
Some Other Stuff That Matters
Age & Time: The younger you are, the more time you have for Roth money to grow tax-free. The older you are, the more you might want that tax break right now.
How Much You Make: Higher earners like pre-tax more. Lower earners tend to like Roth more.
What You Leave Behind: Here’s something most people don’t think about. When you die and leave money to your kids, Roth is amazing for them. They get that money and don’t pay any taxes on it. With pre-tax accounts, they have to pay taxes on everything they take out. So if you care about leaving your kids money, Roth is the move.
No More RMDs for Roth: The government used to make you take money out of your accounts starting at age 73, whether you needed it or not. It’s still required for pre-tax accounts. But Roth 401(k)s? You don’t have to take anything out. That’s actually huge because it gives you way more control. For the official details on this, check out the IRS’s guide on Roth accounts in retirement plans.
What Taxes Might Do
Here’s the thing nobody likes to talk about: we don’t know what taxes will be in the future.
Right now, tax rates are pretty low thanks to a law that was passed in 2017. But that deal expires in 2026. What comes next? Nobody knows for sure. Some people think taxes will go up. Others think they’ll stay the same.
If you think taxes might go up, Roth looks better – pay taxes now at lower rates, be glad later. If you think they might go down, pre-tax looks better. But really, nobody has a crystal ball. Catherine Valega, a financial planner in Boston, sums it up: “We’re in this low-tax sweet spot. I say taxes are on sale.” That’s something worth thinking about.
Real Example: Actually Do The Math
Let’s say you make $75,000 a year and want to save 10% of each paycheck. That’s about $288 every two weeks.
If you do pre-tax: You don’t pay taxes on that $288. All $288 goes into your account. After 30 years, earning 8% per year, you’ve got $937,000 (before taxes).
If you do Roth: You pay taxes first (about $70), so only $216 goes in each time. After 30 years at 8%, you’ve got $703,000 after taxes.
Here’s the crazy part: if you’re in the same tax bracket your whole life, you end up with about the same amount of money either way. So it really does come down to whether taxes go up or down, and other stuff like what you leave to your kids.
The Best Move? Do Both
Here’s a secret: you don’t have to pick just one. Your annual limit is about $23,500 (in 2025) for pre-tax AND Roth combined. So you could put in $12,000 pre-tax and $11,500 Roth. Split the difference.
A lot of smart people do this. It hedges your bets. You get some tax breaks now and some tax-free growth later. It’s like saying, “I don’t know what taxes will be, so I’ll be ready for either.”
The Real Talk
Here’s the honest truth: there’s no perfect answer. Everyone’s situation is different. One financial advisor put it best: “Everyone has their own preferences. We just try to provide the best options for what they’re trying to achieve.”
What matters way more than picking the “perfect” option is actually saving something. The difference between saving and not saving is huge. The difference between 80% right and 100% right? Not as big.
If you can’t decide, go 50/50 and move on. Or talk to a tax person who knows your whole financial picture. They can help you figure out what makes sense for you.
But whatever you do, start now. Even if you change your mind later, you’ve still been building money for retirement. And that’s what really counts.
FAQs
What is the main difference between pre-tax and Roth contributions?
Pre-tax contributions reduce your taxable income today, but you pay taxes when you withdraw the money in retirement. Roth contributions are made after tax, but all qualified withdrawals in retirement are completely tax-free.
Is Roth always better for young people?
Often, yes, because young investors have many decades for their money to grow tax-free. The longer the growth period, the more valuable tax-free compounding becomes compared to a small tax break today.
Who should consider pre-tax contributions instead?
People in high tax brackets today often benefit more from pre-tax contributions because the immediate tax savings are significant. If you expect to be in a lower tax bracket in retirement, paying taxes later can make more sense.
What if I don’t know what tax rates will be in the future?
No one can predict future tax policy with certainty, which is why many investors split their contributions between pre-tax and Roth. This creates flexibility in retirement and reduces the risk of being wrong about where taxes are headed.
Can I contribute to both pre-tax and Roth in the same year?
Yes, as long as your total contributions stay within the annual limit, you can split your savings between the two. This strategy gives you both current tax benefits and future tax-free income.