Pre-tax vs post-tax contributions
Pre-tax contributions reduce your taxable income now but are taxed at withdrawal. Post-tax (Roth) contributions don't reduce taxes now but are tax-free at withdrawal.
When you contribute to a retirement account, the dollar gets taxed at one of two moments: now or later.
Pre-tax (traditional 401(k), traditional IRA): the money comes out of your paycheck before income tax. You pay no tax on it this year. The whole balance — contributions and decades of growth — is taxed as ordinary income when you withdraw in retirement.
Post-tax / Roth (Roth 401(k), Roth IRA): the money is taxed normally on your paycheck before you contribute. You pay tax on it this year. But the entire balance — contributions and all future growth — is withdrawn tax-free in retirement.
Which is better depends on whether your tax rate now is higher or lower than your expected rate in retirement.
- Higher tax rate now than later (peak career → semi-retired) → favours pre-tax
- Lower tax rate now than later (early career → mid career) → favours post-tax/Roth
For most people early in their careers, Roth contributions are better. For peak-earning years, pre-tax usually wins. Many people do a mix to hedge — they don't know what future tax rates will be either, and split contributions across both buckets.
See also
- 401(k) — A US employer-sponsored retirement account. Contributions come out pre-tax, grow tax-deferred, and most employers offer a matching contribution.
- Roth IRA — A US retirement account funded with after-tax dollars. Contributions grow tax-free and withdrawals in retirement are tax-free.
- Marginal vs effective tax rate — Marginal rate is the rate on your next dollar of income; effective rate is the average rate across all your income.
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