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How should I contribute to my 401k? Pre-tax or Roth?

How should I contribute to my 401k? Pre-tax or Roth?

February 22, 2024

A common question I have from clients is, “How should I put money into my 401(k)/403(b)/TSP? Pre-tax or Roth” This is an important question that will impact your tax bill today and, in the future, depending on how you choose to contribute. First let’s review the difference between the contribution types:

  • Pre-tax contributions are dollars that go into your retirement plan on a tax-deferred basis. This means that you do not pay taxes on the dollars you contribute in the year that you earn them.
    • FOR EXAMPLE: My 2024 salary is $100k and I contribute $20k to my 401(k) plan on a pre-tax basis. My income for 2024 will be $80k ($100k salary - $20K 401k plan contribution = $80k income)

Since you do not have to pay taxes in the year the dollars that are earned are contributed, the original tax due is deferred into the future. Typically, until age 59.5 which is when you can begin taking withdrawals from retirement accounts without penalty (in most cases). Once you reach retirement age and begin withdrawing money from your retirement account, the pre-tax dollars and growth will be taxed at ordinary income tax rates in the year the dollars are withdrawn.

  • Roth Contributions are the opposite of Pre-tax contributions. This means the money that you contribute is included in your taxable income in the year you make the contribution. Since you pay taxes on the contributions in the year that the dollars are earned, they grow within the retirement plan on a tax-free basis. Qualified distributions from your Roth 401k, 403b and TSP are completely tax-free. Qualified distributions are withdrawals that are made from the account after age 59.5 and the account has been open for 5 years or longer.

Things to consider when deciding how to contribute to your retirement plan:

  • Phase of your working life and career – how many years do you plan to work, or are you nearing retirement?
  • Your marginal tax rates - today they are historically low and due to sunset in 2026 (in which case they would increase from current rates).
  • Location – state tax laws vary dramatically and can significantly impact retirement income.
  • Retirement income sources and tax implications – rental income, pensions, social security, non-qualified annuities, etc.
  • Timing of withdrawals and/or distribution strategy – which accounts will you liquidate first and which ones last?

My Thoughts:

  • National deficit increasing – revenues are lagging spending. Taxation is main driver of revenue for federal government. How will this impact taxes in the future?
  • Changes in SECURE 2.0 strongly incentivizes Roth contributions for employers and employees. This increases revenue for the federal government today and will provide more economic security for Americans retiring in the future by reducing uncertainty about the impact of taxation on their retirement savings.
  • Retirement savings plans and Social Security alone may not be enough to provide retirement income and security to most retirees of the future. A combination of various asset classes such as real estate, non-qualified annuities, variable life insurance and taxable investment accounts can potentially provide tax savings, more income, and better risk management.


All examples are provided for hypothetical purposes only.  Actual results will vary.  All investing involves risk including the potential loss of principal.  Please work with a tax and legal advisor for your specific situation.