Senior Practice Integration Advisor Katie Collins, CFP®
When saving for retirement through a tax-deferred vehicle, one of the biggest questions—after “how much should I save?”—is whether to contribute to a traditional pre-tax or Roth after-tax strategy. There are many factors to consider, but let’s start with a high-level review of how each option works.
Pre-Tax Savings Vehicle
With conventional savings vehicles such as a traditional IRA or pre-tax 401(k) salary deferrals, your contributions are made before taxes, reducing your taxable income in the current year. You’ll pay income taxes later, when you withdraw the funds in retirement—both on your contributions and the investment earnings.
Key points:
- Contributions reduce your current taxable income.
- Taxes are deferred until withdrawal.
- Required minimum distributions (RMDs) begin at a certain age, meaning you’ll have to withdraw a minimum amount each year, even if you don’t need the income.
Roth After-Tax Savings Vehicle
Roth IRA contributions and Roth 401(k) salary deferrals are made after taxes—meaning you pay income taxes today, but withdrawals in retirement are tax-free, as long as certain conditions are met.
Key points:
- You pay taxes on your contributions now.
- Qualified withdrawals (after age 59 ½ and at least five years after the first contribution) are completely tax-free.
- Roth IRAs are not subject to RMDs, which gives you more flexibility in retirement.
- Income limits may restrict who can contribute directly to a Roth IRA, but there are potential workarounds—check with your CPA.
Which One is Better for My Situation?
In theory, those who are in a lower tax bracket today and expect to be in a higher one in retirement may benefit from saving in a Roth vehicle. Those in a higher tax bracket today who expect to have lower taxable income in retirement might favor traditional contributions.
- Review your current and future tax brackets. While future tax rates are unknown, you can make educated assumptions based on current rates and your projected income needs.
- Think about your age and stage of life. If you need more cash flow today, pre-tax traditional contributions may make sense, since they lower your current tax bill. Young savers often benefit from Roth contributions because they have more years for tax-free growth.
- Review your income and eligibility. Direct Roth IRA contributions have income limits but options like Roth 401(k) salary deferrals or ‘backdoor’ Roth contributions can help higher earners participate. Consult with your CPA to explore these approaches.
- Diversify your tax strategy. Many people choose to contribute to both traditional and Roth accounts. This mix gives you flexibility in retirement by providing both taxable and tax-free income.
When deciding between pre-tax retirement savings and after-tax retirement savings, there isn’t a universally right choice. The most important decision is to start saving. From there, your financial advisor or CPA can help you fine tune the mix of traditional and Roth contributions to align with your tax situation, goals, and long-term plan.
About the author: Practice Integration Advisor Katie Collins, CFP®, helps dentists organize their financial lives so they can focus on what truly brings them joy, while providing clarity as they navigate their careers. Her duties include leading client relationships, gathering information, preparing data, and implementing the wealth plan. She quarterbacks the entire financial picture, often for clients who have never put all the pieces together with one advisor.
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