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How to Choose Between Pre-tax and Roth Contributions

April 26th, 2023 | 3 min. read

By Jacob Schroeder

Whether starting a new job or trying to save more for retirement, you’ll likely have to answer this question: Should I contribute to a pre-tax or Roth account?

The choice between pre-tax accounts (401(k) and traditional IRA) and Roth accounts (Roth 401(k) and Roth IRA) generally depends on two things: your current tax rate and your future tax rate. That’s because of the critical difference in how pre-tax and Roth accounts are taxed. But there is more you should consider depending on your goals.

At Advance Capital Management, we know how costly unnecessary tax mistakes can be. That’s why we consider the tax consequences of every financial decision clients make. A big part is saving funds for long-term goals in the proper accounts.

So, if you find yourself at the crossroads of pre-tax vs. Roth contributions, here are the things to help you decide which is right for you.

This article covers:

  • Pre-tax contributions
  • Roth contributions
  • Compare your current and future tax brackets
  • Consider your legacy goals
  • Taking advantage of pre-tax and Roth contributions

Pre-tax contributions

With a pre-tax account, your contributions are not taxed, and they lower your taxable income. But, you pay ordinary income taxes on your contributions and earnings when you withdraw the money in retirement. So, you get tax benefits upfront.

Roth contributions

Contributions to a Roth account, on the other hand, are taxed upfront. Unfortunately, that also means your contributions are not tax-deductible. The good news is that you can withdraw your contributions and earnings tax-free. So, you get to enjoy the tax benefits later.





  • Pre-tax dollars
  • Tax-deductible; pay taxes later
  • After-tax dollars
  • Not tax-deductible; pay taxes now

Deferral Limits

  • 401(k): $22,500 ($30,000 if you’re age 50 or older) in 2023 (See IRS Limit)
  • IRA: $6,500 ($7,500 if you're age 50 or older) in 2023 (See IRS Limit)
  • Roth 401(k): $22,500 ($30,000 if you’re age 50 or older) in 2023 (See IRS Limit)
  • Roth IRA: $6,500 ($7,500 if you're age 50 or older) in 2023 (See IRS Limit)

Income Limits

  • 401(k): No limit to participate
  • IRA: $153,000 filing single, $228,000 filing jointly in 2023 (See IRS Limit)
  • Roth 401(k): No limit to participate
  • Roth IRA: $153,000 filing single, $228,000 filing jointly in 2023 (See IRS Limit)



Tax-free for qualified distributions


Subject to federal and most state income taxes

Tax-free for qualified distributions

Note: Employer contributions are taxed

Compare your current and future tax brackets

A simple way to arrive at an answer is to ask yourself whether you expect your future tax rate to be higher than your current tax rate. The goal, of course, is to pay at a lower rate.

With that said, if your tax bracket is lower, paying taxes now on Roth contributions may make sense. People typically in this situation are younger workers who expect to earn more later in their careers. As a result, their contributions and earnings can grow tax-free for decades.

Therefore, younger workers should consider saving in a Roth 401(k), if one is offered in their employer’s retirement plan. However, it won’t hurt to contribute to both if you don’t know how your tax rate may change.

Conversely, if you expect your future tax rate to be lower, go with the pre-tax account. High earners, for example, would benefit more from pre-tax contributions because of the upfront tax breaks.

Also, someone far along in their career and who has maxed out their employer-sponsored account is a good example. That person is likely at the peak of their earning potential and can realistically expect a lower tax rate in retirement. Here, a pre-tax traditional IRA would make more sense than a Roth IRA.

Consider your legacy goals

Another possible factor in your decision is your estate plans or legacy goals. Especially if you plan to leave your funds to a non-spouse beneficiary.

Non-spouse beneficiaries must withdraw all the funds within 10 years of your passing. Therefore, Roth IRAs can be a more efficient way to pass on wealth than traditional pre-tax accounts because non-spouse beneficiaries won’t owe taxes on withdrawals.

Taking advantage of both pre-tax and Roth contributions

In some instances, you can take advantage of the tax advantages of both pre-tax and Roth accounts.

You are not required to choose only one option. You can split your contributions into both types of accounts. This could be a way to diversify your retirement savings and hedge against your tax rate being different than planned upon retirement.

Further, there may be times when a Roth conversion makes sense. This is a transfer of some or all your funds from a 401(k) or traditional IRA to a Roth IRA. You will owe federal income taxes on the amount you convert that year. Times when you might consider a Roth conversion include when your income is lower this year than a typical year or when your pre-tax accounts have lost value.

There are various tax rules to navigate here, so these moves are best made with the guidance of a tax or financial professional to avoid triggering any unnecessary taxes.

The bottom line

Each person’s financial needs are unique, and you may have considerations beyond your current and future tax rates. Therefore, if you can’t choose between pre-tax or Roth contributions, schedule a free consultation from an Advance Capital Management adviser who can help figure out what's best for your financial situation.

Learn more about saving and investing in an IRA by downloading our Guide: IRAs: What You Should Know. Whether you’re a stay-at-home parent, small business owner, freelancer or someone who just doesn’t like their 401(k), our guide explains how you can save for retirement.

IRAGuide_Acm-coverDownload the Guide to IRAs