Eric Schaefer, Financial Advisor
@EricSchaefer
Great question!
Pre-Tax Dollars - The benefit of contributing to a pre-tax 401(k) account is a reduction in your current year taxable income and tax due. This is particularly valuable for individuals in high tax brackets who expect a lower taxable income in retirement. Future distributions are considered taxable ordinary income in the year they are withdrawn. Growth, in addition to your current contributions are both taxable when withdrawn.
Roth Dollars - These contributions go into the plan on an after-tax basis. The contributions do not decrease the reported income to the IRS, but the real benefit is that there will be no tax due on distributions in retirement. The growth and contributions can be withdrawn tax free in retirement. For younger investors with lower incomes now than they expect in the future will benefit from tax free growth for life.
These answers are assuming you are over 59.5 at the time of retirement. Having both pre-tax and Roth dollars in retirement will provide a good deal of flexibility regardless of what the future tax rates look like. If rates go down, you will be able to withdraw the pre-tax dollars at a preferred rate. If they go up, the tax paid on your Roth contributions initially will be less than potential tax due upon distribution.
Did we answer your question?