One of the most common questions we hear from clients involves their workplace retirement accounts: "Should I contribute to my 401(k) pre-tax or use the Roth option?" It's a decision that can feel overwhelming because you're essentially trying to predict the future. The core question becomes: "When will my tax rate be lower—today while I'm working, or years from now when I'm withdrawing this money in retirement?"
Both options have their merits, but the absolute "correct" answer won't be known until you actually start making withdrawals, potentially decades from now. Since none of us has a crystal ball that can forecast tax rates in 2045 or beyond, let's explore some practical frameworks to help you make the best decision for your situation.
Understanding the fundamental difference
Before diving into specific scenarios, let's clarify what separates these two options:
With pre-tax 401(k) contributions, you get a tax break today. Your contributions reduce your current taxable income, effectively lowering your tax bill right now. However, in retirement, you'll pay ordinary income tax on both your original contributions and all the growth when you withdraw the money.
With Roth 401(k) contributions, you pay taxes on the money now—contributions are made with after-tax dollars. The significant advantage comes later: in retirement, you can withdraw both your contributions and all the growth completely tax-free, assuming you follow the rules.
When Roth makes the most sense
If you're in a position where you don't anticipate needing all your retirement savings and want to leave a financial legacy for your heirs, the Roth option becomes particularly attractive.
Why? Because Roth accounts create a multi-generational tax advantage. Not only will your withdrawals be tax-free during your lifetime, but your beneficiaries will also receive the inheritance free of income tax. While they'll eventually need to withdraw the money (under current inheritance rules), they won't owe income tax on those distributions.
Another significant benefit of Roth accounts is that they aren't subject to Required Minimum Distributions (RMDs) during your lifetime. This means you're not forced to withdraw money at age 73 (or whatever age Congress may set in the future), giving you more flexibility in retirement planning.
When Pre-Tax contributions make more sense
If you're finding it challenging to set aside money for retirement while managing your current expenses, pre-tax contributions might be the more practical choice. When you contribute pre-tax, your take-home pay doesn't decrease as much as it would with Roth contributions.
For example, if you're in the 22% federal tax bracket, a $500 monthly pre-tax contribution only reduces your take-home pay by about $390 (the $500 minus the $110 you would have paid in taxes). The same $500 contribution to a Roth account would reduce your take-home pay by the full $500.
This difference can be significant if you're stretching your budget to contribute enough to capture your employer's matching contribution—which is essentially free money you don't want to leave on the table. In this scenario, your immediate financial well-being takes priority over optimizing your lifetime tax strategy.
The balanced approach: Using both strategies
For many people, especially those uncertain about their future tax situation, a combined approach offers the best of both worlds. This strategy creates tax diversification, giving you more flexibility in retirement.
Here's how this works in practice: In retirement, everyone has a certain amount of income they can receive tax-free each year (currently the standard deduction is $15,000 for single filers and $30,000 for married couples filing jointly in 2025, and these figures typically increase with inflation). By withdrawing just enough from your pre-tax accounts to reach this threshold, you can effectively access that money without paying any federal income tax.
Then, for additional income needs, you can tap your Roth accounts or other tax-advantaged sources like Health Savings Accounts (HSAs) or strategically harvested capital gains from brokerage accounts.
This approach becomes even more powerful with thoughtful planning in your 60s, before RMDs begin. You can strategically withdraw from pre-tax accounts (or convert them to Roth) to "fill up" lower tax brackets, potentially reducing the impact of RMDs later and creating more tax-free growth opportunities.
Making your decision: practical considerations
As you weigh these options, consider these additional factors:
Current vs. expected future tax rates: If you believe your tax rate will be higher in retirement (perhaps due to successful investing or changing tax policy), Roth contributions become more attractive.
Time horizon: The longer your money will grow, the more beneficial the tax-free growth of Roth accounts becomes.
State tax considerations: If you plan to retire in a state with different income tax rates than where you currently live, this could influence your decision.
Flexibility needs: Roth contributions (but not earnings) can be withdrawn without penalty before retirement, providing emergency access if absolutely necessary.
The Bottom Line
While we can't predict future tax rates with certainty, we can help you evaluate your personal circumstances to make an informed decision. For many of our clients, the balanced approach of using both pre-tax and Roth options provides the most flexibility and tax diversification.
Remember that this doesn't have to be an all-or-nothing decision. You can adjust your strategy as your financial situation evolves, and many employers allow you to split your contributions between pre-tax and Roth options.
If you'd like to discuss your specific situation and develop a personalized strategy for your retirement contributions, please reach out to us. We're here to help you navigate these important financial decisions with confidence and would love to talk with you.