What’s the real difference between saving in pre-tax dollars and Roth dollars in your 401(k)?
For many employees, the distinction isn’t always clear, and understanding the tax impact is important both now and later in retirement.
Welcome to 401(k)ompass, a series of two-minute videos to help you manage your 401(k) more effectively by addressing current issues and challenges.
In this episode, Retirement Education Consultant Yaz Hughes explains how pre-tax and Roth contributions work and what factors matter when comparing the two.
- Pre-tax dollars are added to your account before taxes are taken out of your paycheck. This can lower your taxable income for the year. The tradeoff is that withdrawals in retirement are taxable.
- Roth dollars are contributed after taxes. If two requirements are met — being at least 59½ and having made your first Roth contribution at least five years earlier — withdrawals can be taken tax-free. This structure allows you to lock in your tax rate now and avoid taxes on qualifying distributions later.
As Yaz highlights, there is no single answer that fits everyone. The decision depends on your current tax bracket, what you expect your income to look like in retirement and how you prefer to manage taxes over time. Some people use both contribution types to balance these factors.
This short episode breaks down the essentials of pre-tax and Roth contributions and can help you decide which approach may work best for you or your employees.