Roth vs Pre-Tax Contributions: Which Should You Choose? [VIDEO]

Roth vs Pre-Tax: What's the difference?

Pre-tax contributions are where you don't pay tax on the contribution now, but you have to pay tax on any money you take out of your account in retirement.

Roth, or after tax contributions are where you pay tax on your contribution now, but you don't have to pay tax at all when you withdraw the money.

There are tons of different opinions and perspectives on which option to choose. It all comes down to the tax rate you're paying now, and the tax rate you'll pay in retirement.

Since our government can change tax rates, we can't be sure of what your tax rate will be when you retire.

Which should you choose?

But, there are some general principles for making an educated choice when choosing between roth vs pre-tax contributions.

Here is a general rule of thumb. If you expect to earn raises, and have decades left in your career, Roth contributions might be a good idea for you.

But, if your pay will likely remain stable, and your retirement outlook is shorter, you might want to consider pre-tax contributions.

Or Maybe a Little of Both?

A third option is to contribute some money to pre-tax and some money to roth.

That way, you're getting a little tax benefit now, and when it comes time to retire you can choose from year to year which bucket to take from.

Some years you might have more tax deductions, so you'd take from the pre-tax account and pay the taxes, and the years you're already paying a lot in taxes you take from the roth.

Roth Vs. Pre-Tax in Your 401k Plan

Also keep in mind, contributing 4% pre-tax or 4% roth wouldn't change the amount your employer contributes to your 401k. Their contributions are always pre-tax.

The Most Important Thing . . .

Remember, there is no right answer. Roth vs Pre-tax isn't the most important thing to consider! It definitely isn't something to stress over. The key is that you are saving... these are just some general principles to keep in mind as you decide which contribution type to choose.

The Step-By-Step Guide To Your 401k Plan

We have been asked whether to choose roth or pre-tax by many individuals in the 401k plans that we manage. We knew that many individuals needed help with their 401k plans, so we created a course called "The Step-by-step Guide to your 401k plan."So far we have had over 12,000 individuals enroll in this course! If you enroll, this course will help you come up with a simple plan to reach retirement using your 401k plan.

• Should you enroll in my 401k?
• How much should you save in your 401k?
• Which investments should you choose in your 401k?
• Pre-tax or Roth in your 401k?
• How do you get all the free money offered to you by your employer?

Getting these answers wrong could cost you thousands of dollars! Enrolling in this course could be one of the best financial decisions you'll ever make.We will walk you through the whole process of enrolling and maximizing your 401k using easy to understand white-board animation videos.You will learn why you should care about your 401k, how much to save, which investments to choose, and how to get all the free money your employer is offering you. Questions? Contact one of our financial advisors today!