Roth or Pre-Tax Retirement Contributions: Which is Better for Me?

When you begin investing through a 401(k), 403(b), Individual Retirement Account (IRA), or other retirement savings account, often one of the first questions you face is whether to invest through the Roth or pre-tax (aka “traditional”) option. Analyzing your personal circumstances to answer this question can be confusing.

We think Vestwell, our platform partner, explains the difference between Roth and pre-tax accounts exceptionally well. And they use helpful graphics.

1. This Vestwell explanation highlights why Roth might be a better choice for many people. Note: the article names IRA and 401(k) accounts. The logic typically also applies to 403(b), TSP (for government workers) and other retirement savings accounts that have Roth and pre-tax versions.
2. And this second explanation goes into more detail about the differences between Roth and pre-tax accounts.

Don’t delay saving because you are not sure what the answer is.

Whether you have access to an employer-sponsored plan or are thinking about opening an IRA, we encourage you to begin saving today if you can. If deciding between Roth and pre-tax is preventing you from taking action, you might choose Roth or pre-tax or some sort of split (contributing to both is allowed)* for now until you have more time to consider. Later, if you revise your strategy, you can change the settings.** What you (probably) will not be able to do later is travel back in time to start saving earlier.

Whether you choose to contribute to a Roth account, a pre-tax account, or both, investing through one of these tax-advantaged accounts may benefit you more than investing through a non tax-advantaged account, like a standard brokerage account, or holding the cash in your savings account.

We are here to help.

Want to fine tune your retirement saving strategy? If you are a Just Futures plan participant, you can contact us to reserve a meeting with a professional about your specific situation and how to set yourself and your family up for a dignified retirement while helping build a regenerative economy.

If your employer uses a plan administrator other than Just Futures, ask your human resources representative whether they offer support.

*The IRS sets annual limits for the total amount you can contribute to employer-sponsored retirement savings accounts. This is a combined limit for contributions between your pre-tax and Roth accounts. These limits are separate from IRS limits on contributions to IRAs. Further, Roth IRAs have income limits.

**Changes you make to the type or amount of your contribution will be proactive. That is, they will change your future savings. You typically cannot recharacterize past Roth contributions to instead be pre-tax or vice versa with just a few clicks. A process whereby you can recharacterize past pre-tax savings to become Roth savings does exist. It is called a conversion, and carries tax implications. If you have the means, you could consider consulting a tax professional for further assistance.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind.

The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Just Futures explicitly disclaims any responsibility for product suitability or suitability determinations related to individual investors.

Investing involves the risk of loss that clients should be prepared to bear. No investment process is free of risk; no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There is no guarantee that your investment will be profitable. Past performance is not a guide to future performance. The value of investments, as well any investment income, is not guaranteed and can fluctuate based on market conditions.

Published Nov 7, 2024