As you plan for your retirement, you may have heard about Roth and pre-tax accounts. The two have some similarities, and they’re both important tools for retirement planning, but there are some key differences you should understand before making a decision about which one is right for you. Here’s a closer look at pre-tax vs Roth and what you should know in 2023.
What Is a Pre-Tax Account?
A pre-tax account is any type of retirement savings account that allows you to contribute a certain percentage of your income each year before you pay taxes on it. This means you’ll pay fewer taxes on your income that year, and the money you save can be put into a retirement account for future use. The most common types of pre-tax accounts are 401(k)s, 403(b)s, and traditional IRAs.
With pre-tax accounts, your contributions are tax-deductible in the year you make them, so you’ll save on taxes that year. But when you withdraw money from the account in retirement, you’ll have to pay taxes on the withdrawals. That means you’ll have to pay taxes twice on the money you put into the account: once when you contribute it and again when you take it out.
What Is a Roth Account?
A Roth account is a type of retirement savings account that allows you to contribute a certain percentage of your income each year after you pay taxes on it. This means you’ll pay taxes on the money you put into the account in the year you make the contribution, but you won’t have to pay taxes on the money when you withdraw it in retirement. The most common types of Roth accounts are Roth 401(k)s, Roth 403(b)s, and Roth IRAs.
With a Roth account, you won’t get a tax break when you contribute money, but you won’t have to pay taxes when you take the money out in retirement. That means you’ll only pay taxes once on the money you put into the account, and you won’t have to worry about paying taxes twice on the same money.
What Are the Benefits of Pre-Tax vs Roth?
The main benefit of a pre-tax account is that you’ll get an immediate tax break when you contribute money to it. This can be a great way to save on taxes in the year you contribute money to the account. However, you’ll have to pay taxes on the money when you withdraw it in retirement.
The main benefit of a Roth account is that you won’t have to pay taxes on the money when you withdraw it in retirement. This can be a great way to save on taxes in the future, when you’re in a higher tax bracket. However, you won’t get a tax break when you contribute money to the account.
Which Is Better: Pre-Tax or Roth?
The answer to this question depends on your individual situation. If you’re in a lower tax bracket now and expect to be in a higher tax bracket in retirement, then a Roth account may be the better option. This is because you’ll pay taxes on the money now, when you’re in a lower tax bracket, and you won’t have to pay taxes on the money when you withdraw it in retirement.
On the other hand, if you’re in a higher tax bracket now and expect to be in a lower tax bracket in retirement, then a pre-tax account may be the better option. This is because you’ll get an immediate tax break when you contribute money to the account, and you’ll still have to pay taxes on the money when you withdraw it in retirement.
What Should You Do?
When it comes to pre-tax vs Roth accounts, the best option for you depends on your individual situation. It’s important to think about your current and future tax brackets, as well as your retirement goals, before deciding which type of account is right for you. You may also want to speak to a financial advisor to get advice tailored to your situation.
No matter which type of account you choose, it’s important to start saving for retirement as soon as possible. Both pre-tax and Roth accounts can be great tools for retirement planning, and the sooner you start contributing, the more time your money will have to grow.
