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Pre-tax vs Post-tax Roth employee retirement contributions

Pre-Tax vs After-Tax Roth Contributions

Pre-Tax Contributions: When you make pre-tax contributions to your retirement plan, the amount is deducted from your paycheck before taxes are calculated. This means your taxable income is reduced, which can lower your tax bill for the year. However, you will pay taxes on these contributions as well as any investment earnings when you withdraw the funds during retirement.

Key Advantages

  • Reduces your taxable income now.
  • Taxes are deferred until you withdraw the funds.
  • Potentially beneficial if you expect to be in a lower tax bracket in retirement.

Roth Contributions: Roth contributions, on the other hand, are made with after-tax dollars. This means that you pay taxes on your contributions now, but your withdrawals during retirement—including both contributions and investment earnings—are tax-free, provided certain conditions are met.

Key Advantages

  • Qualified withdrawals in retirement are tax-free.
  • Potentially beneficial if you expect to be in the same or a higher tax bracket in retirement.
  • No immediate tax benefit, as contributions are made with after-tax dollars.

Click here for more information on after-tax Roth contributions.

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