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 Future distributions are considered taxable ordinary income in the year they are withdrawn. Growth, in addition to your current contributions are both taxable when withdrawn.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 The growth and contributions can be withdrawn tax free in retirement.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.
WalletHub Answers is a free service that helps consumers access financial information. Information on WalletHub Answers is provided “as is” and should not be considered financial, legal or investment advice. WalletHub is not a financial advisor, law firm, “lawyer referral service,” or a substitute for a financial advisor, attorney, or law firm. You may want to hire a professional before making any decision. WalletHub does not endorse any particular contributors and cannot guarantee the quality or reliability of any information posted. The helpfulness of a financial advisor's answer is not indicative of future advisor performance.
WalletHub members have a wealth of knowledge to share, and we encourage everyone to do so while respecting our content guidelines. This question was posted by a WalletHub user.
Please keep in mind that editorial and user-generated content on this page is not reviewed or otherwise endorsed by any financial institution. In addition, it is not a financial institution’s responsibility to ensure all posts and questions are answered.
Ad Disclosure: Certain offers that appear on this site originate from paying advertisers, and this will be noted on an offer’s details page using the designation "Sponsored", where applicable. Advertising may impact how and where products appear on this site (including, for example, the order in which they appear). At WalletHub we try to present a wide array of offers, but our offers do not represent all financial services companies or products.