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Pre-Tax or Roth? Your 401(k) Options Explained

June 21, 2023

Deciphering the world of retirement savings can be like solving a puzzle. And, when it comes to choosing between Pre-Tax or Roth options for your 401(k), it can be particularly perplexing. But worry not! Today, we are going to break down these options so you can make an informed decision that benefits your future. And if you still have questions or need personalized advice, Shah Total Planning has got your back.

Pre-Tax 401(k) – Traditional Flavor

Let’s start with the traditional Pre-Tax 401(k). In this version, the contributions you make to your account are made before taxes are taken out of your paycheck. This reduces your taxable income for the year, which in turn can reduce the amount of income tax you owe.

For instance, if you make $60,000 annually and contribute $10,000 to a Pre-Tax 401(k), you’ll only be taxed on $50,000.

Here’s the catch – you’ll have to pay taxes on your contributions and the earnings when you withdraw them in retirement. The idea is that you might be in a lower tax bracket when you retire compared to your working years.

Pros:

  • Reduces taxable income now
  • Potentially pay lower taxes on withdrawals if in a lower tax bracket in retirement

Cons:

  • Taxes owed on both contributions and earnings at withdrawal
  • Required Minimum Distributions (RMDs) starting at age 72

Roth 401(k) – A Modern Twist

Now, let’s talk about the Roth 401(k). Unlike the Pre-Tax option, contributions to a Roth 401(k) are made with after-tax dollars. This means that your taxable income now isn’t reduced, but the big benefit is that withdrawals in retirement are generally tax-free.

Continuing with our example, if you make $60,000 and contribute $10,000 to a Roth 401(k), you’ll be taxed on the full $60,000 now, but not owe taxes on the $10,000 (or its earnings) when you withdraw in retirement.

Pros:

  • Tax-free withdrawals in retirement
  • No Required Minimum Distributions (RMDs) if rolled into a Roth IRA

Cons:

  • Doesn’t reduce your current taxable income
  • Potentially less beneficial if you’re in a higher tax bracket in retirement

Which One to Choose?

Choosing between a Pre-Tax 401(k) and a Roth 401(k) depends on various factors including your current income, expected retirement income, and your outlook on future tax rates.

If you expect to be in a lower tax bracket in retirement, a Pre-Tax 401(k) might be more beneficial. On the other hand, if you think your taxes will be higher in retirement, or if you want to avoid RMDs, a Roth 401(k) might be the way to go.

Call to Action – Shah Total Planning

Remember, this is a critical decision and personalizing your retirement plan is essential. If you’re uncertain about which 401(k) option is right for you, it’s time to seek expert advice.

Shah Total Planning specializes in helping individuals make wise financial decisions. Their team of experienced professionals can analyze your specific situation and provide tailored recommendations.

Don’t leave your retirement to chance. Reach out to Shah Total Planning today and take control of your financial future!

Contact Shah Total Planning for a personalized retirement planning session.


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Schedule your free Exploratory phone call

Click here to see how we
can be of assistance.

Careers/Open Positions

Explore all available job
listings and become a part of an amazing team.

Our Social Media

Connect with us on Social Media using the following buttons:

Visit our Podcasts

Listen in, Join the Conversation!

Recent Posts
How Insurance Deductibles Work

An insurance deductible is the amount you, the insured, pay before any claim is paid ...

The post How Insurance Deductibles Work first appeared on Integrated Tax Planning, Legal Planning & Financial Planning.

See more
Enhancing Estate Planning through Heir Involvement

Estate planning goes beyond legal formalities; it’s an essential process that facilitates meaningful family dialogue ...

The post Enhancing Estate Planning through Heir Involvement first appeared on Integrated Tax Planning, Legal Planning & Financial Planning.

See more
Social Security, Medicare, and HSAs

If your employer health plan is a health savings account (HSA) paired with a high-deductible ...

The post Social Security, Medicare, and HSAs first appeared on Integrated Tax Planning, Legal Planning & Financial Planning.

See more