Lesson 5 - Pre-tax vs. Roth contributions

3 MIN READEditorial Policy

Pre-tax vs. Roth contributions

Understanding the differences between the two can help influence how you save.

Understand different deferral types

The main difference between traditional (pre-tax) and Roth (post-tax) deferrals is the way they’re taxed.

Traditional 401(k) deferrals (pre-tax) 

  • Pre-tax contributions are made to your 401(k) account before federal and state taxes are taken out. 

  • Contributions are often set at a percentage of an individual’s salary but can be a predetermined dollar or percentage if your plan allows. 

  • Pre-tax deferrals delay income tax until distribution, meaning you pay taxes on the deferral and earnings when your funds are withdrawn. 

Roth 401(k) deferrals (post-tax) 

  • Roth contributions are made on an after-tax basis (also known as a post-tax deduction), meaning the total amount you contribute is deducted after federal and state taxes have been taken out. 

  • Because you already paid taxes on your Roth deferral, it’s not subject to income taxation when withdrawn.

  • However, earnings on your Roth contributions may be subject to taxes if you do not meet certain requirements.

What should you decide?

Consider your current vs. future tax brackets, if you'll need the money before retirement, and more.

Three questions to ask 

These questions can help guide your thinking on whether you should contribute pre-tax or post-tax deferrals to your 401(k).

1. Will I be in a higher tax bracket today, or when I retire?

  • Today (generally, high earners and older workers): Consider pre-tax deferrals

  • When I retire (generally, low earners and younger people): Consider post-tax deferrals

2. Is there a chance I’ll need to withdraw before age 59 ½?

  • Yes: Consider post-tax deferrals

  • No: Consider pre-tax deferrals

3. Is there a time (before retirement) when I’ll be making less than I am now?

  • Yes: Consider pre-tax deferrals

  • No: Consider post-tax deferrals

How to decide between Roth and pre-tax deferrals

Put your money to work 

At Human Interest, you can choose pre-tax or Roth contributions—or do a combination of both.

Update your contributions today

Claudia Newman manages the Retirement Education team that helps onboard employees to their Human Interest plan and explains the benefits of a 401(k) plan by offering live training. She has been working in the 401(k) and retirement plan industry in several capacities, including relationship management, sales, and back-office support since 2010.

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The (k)ickstart program is administered and offered by the recordkeeper, Human Interest Inc. ("HII"). HII's subsidiary and registered investment adviser, Human Interest Advisors ("HIA"), receives a fee based on assets under management. As such, HIA will earn more in asset-based fees if a plan participant increases their contribution in connection with the program.