Pre-Tax vs. Roth Contributions: What’s Best for You?

Share on facebook
Share on twitter
Share on linkedin
Share on email

Most company-sponsored retirement plans allow employees to defer compensation through traditional, pre-tax dollars and Roth dollars. What’s the difference?

time concept money growing retirement planning pre-tax vs. roth

By Neil Boone, CFP® and Brittany Weiler

There are generally two primary sources to save money within a company-sponsored retirement plan—401(k) or 403(b). The traditional, pre-tax, convention allows you to save a portion of your compensation tax-deferred, meaning you don’t have to pay current taxes on the amounts deferred into your retirement plan.

The Roth convention allows you to defer your compensation tax-free, as a separate source of money, meaning the amount deferred is included in gross income for that year and current taxes must be paid.

In summary:

  • Traditional (pre-tax): tax-deferred savings, where taxes are paid upon withdrawal.
  • Roth: tax-free savings, where eligible distributions (including earnings) are generally tax-free.
  Pre-Tax Roth
Contributions Before-tax dollars

Tax-deductible; pay taxes later

After-tax dollars

Not tax-deductible; pay taxes now

Deferral Limit See IRS Limit See IRS Limit
Income Limit No limit to participate No limit to participate
Growth Tax-deferred Tax-deferred
Taxation of Withdrawals Subject to federal and most state income taxes Tax-free for qualified distributions

For more information, see IRS comparison, including details for Roth 401(k) vs. Roth IRA.

How to Decide: Pre-Tax vs. Roth?

When a 401(k) or 403(b) retirement plan offers both pre-tax and Roth as deferral sources, employees can often choose pre-tax, Roth, or a combination of both. These are separate account sources of money to save within your retirement plan.

Here are some considerations to factor into your decision:

  • Understand how your marginal tax rate now compares with your expected tax rate in retirement.
  • How much do you plan to contribute? Will the amount you defer bring you to a lower marginal tax rate?
  • How does this fit into your overall retirement plan?
  • Understand retirement plan distribution rules (i.e., penalties, etc.).

Pre-Tax vs. Roth Example

Let’s say your income is $60,000, you contribute $10,000, and you are in the 22 percent tax bracket. Pre-tax contributions reduce your taxable income by the amount of your contribution.

Taxable Income

(before contributions)

$60,000 $8,990
Annual Pre-Tax Contribution $10,000
Taxable Income

(after contributions)

$50,000 $6,790
Tax Savings   $2,200

*Based on 2020 tax tables for a single filer

From there, your contributions will grow until retirement and, upon withdrawal, the full amount (including any gains) are taxed at the tax rates for the year they are withdrawn. Generally, this would be a good option for an individual’s highest income years when deductions are more meaningful, or when someone is close to retirement age.

By contrast, Roth contributions do not receive a tax deduction in the current year. Even though it is not desirable to have a lower initial contribution, it is highly beneficial to know that you never have to pay tax on this money again. Both Roth contributions and gains are distributed tax-free upon retirement. Generally, this would be a good option when there are many years until retirement or for those in lower tax brackets.

Note: In both cases, withdrawals after age 591/2 avoid early withdrawal tax penalties. Roth accounts also have provisions that allow for withdrawal of initial contributions in certain situations. Consult your tax advisor to determine the option best for you.


There are plenty of positives to both pre-tax and Roth contributions to your 401(k) or 403(b). Having a diversified portfolio of assets can help you maximize your gains, especially if the future is unclear.

Please reach out to Brighton Jones by email or schedule a phone appointment to discuss your situation with an advisor.

Neil Boone, CFP® is an advisor in Brighton Jones’ Scottsdale office. Brittany Weiler serves as a retirement plan advisor.

Read more from our blog:


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Brighton Jones LLC), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained on this blog serves as the receipt of, or as a substitute for, personalized investment advice from Brighton Jones LLC.

To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Brighton Jones LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Brighton Jones LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Brighton Jones is not affiliated with Facebook, Twitter, LinkedIn, Google+, YouTube or other social media websites and we have no control over how third-party sites use the information you share. Please remember that you should never communicate any personal or account information through social media and it is important to familiarize yourself with their respective privacy and security policies.