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401k Investing Roth or Traditional

401k’s are great savings vehicles for employees and have additional tax advantages if properly utilized.


Most employers usually offer both pre-tax and Roth after-tax accounts. The difference between these is noted below:

  • Pre-tax contributions are deducted before income taxes are withheld, which lowers your current taxes owed.  These taxes will need to be paid on contributions and earnings when you withdraw them in retirement.
  • Roth after-tax contributions are deducted after income taxes are paid, but the distributions you receive in retirement are entirely tax-free.


When deciding if a pre-tax or Roth 401k is right for you it is key to predict what you think your tax rate may be in retirement compared to your current tax rate. In most cases, in your early years of working, your tax rate will be low so utilizing a Roth 401k is usually the best option. Additionally, with tax rates reaching historic lows and US debt levels increasing at an unsustainable pace, it is likely that taxes will be significantly higher in the future. This is another compelling reason to lean toward utilizing the Roth 401k.

Other 401K Considerations

Pre-tax contributions could be better if:

  • You would reduce your 401k contributions if you didn’t get the tax savings (i.e. you need the extra money).

Roth after-tax could be better:

  • If you want to avoid social security taxes (Roth distributions aren’t included in Social Security taxation calculation compared to pre-tax contributions which are).
  • If you are a high earner and not eligible for ROTH IRA contributions.
  • Expect to pass on the account to heirs as an inherited Roth won’t be subject to income tax.


If you are under 50, you can contribute up to the 2022 IRS limit of $20,000 (this is a total of both pre-tax and Roth contributions and does not incorporate what the company may match or contribute to your 401k). If you are 50 or older, you can make an additional contribution of $6,500 for a total of $26,500.

Qualified Distribution (Roth 401k Only)

Two requirements for a qualified distribution:

  •   Roth after-tax account has been open for at least 5 years and
  •   The distribution is after age 59 1/2, or due to death or disability.


There are a lot of flexibility with these plans and you can split your contributions between the pre and post-tax contributions and change these allocations over time.

One of the key considerations in thinking about pre or post tax accounts is how much time until you expect to retire.

5-10 Years to Retirement

  •   Pre-tax can be appealing if you believe you will be entering a lower tax bracket and plan on utilizing the money in the account sooner rather than later.
  •   Post-tax can still be attractive if you are not going to be utilizing the money (likely utilized for inheritance and/or would be the last source of funds used during retirement to allow it to grow over a longer period of time).

10-20 Years to Retirement

  •   If you don’t have much in a Roth 401k, this is the time to make this happen (if you can). It will diversify your investment savings and you still have a lot of time to grow the capital tax free.
  •   Think about converting pre-tax savings to Roth. This is called an In-Plan Conversion and can be very advantageous if done well (see more below).

20+ Years to Retirement

  •   Pre-tax savings could be the way to go if you need to extra money (i.e. down payment on a house, paying off student loans, etc.)
  •   If you can afford it, Roth is the best option as compounding tax free can be incredibly fruitful over a long period of time.

Tax diversification can help over time and provide the ability to save on taxes and grow assets when taxes may be higher because of higher income.

Back-door Roth Conversions

Roth conversions allow you to convert a portion or all of your pre-tax account to Roth after-tax dollars. You can do this in multiple phases to spread the tax burden over a number of years, lessening a dramatic tax hit and allowing for the possibility of converting in a year where you have less earnings.

Note: For tax-free treatment on money converted, you have to be at least 59 1/2 for withdrawal and it has to be five years since the earliest of the first conversion or first Roth contribution.

With tax rates reaching historic lows and US debt levels increasing at an unsustainable pace, it is likely that taxes will be significantly higher in the future. This is another compelling reason to lean toward utilizing the Roth 401k.

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