Pretax vs Roth Contributions: What’s The Difference?

Deciding between pretax and Roth contributions plays a big role in shaping your retirement savings. Both options offer tax advantages, but they work in different ways. Pretax (traditional) accounts generally provide tax-deferred growth, while Roth accounts may offer tax-free qualified growth.

Plans such as IRAs, 401ks, and Solo 401ks often include both choices. Here’s how pretax and Roth contributions differ, and what to consider when deciding which option could work better for your situation.

What’s the Difference Between a Pretax and Roth Contribution?

Before choosing between pretax and Roth, it’s useful to see how each option works individually. Each type has different tax rules that can affect your savings strategy.

Pre-Tax Contributions

Pretax contributions, sometimes called traditional contributions, are made with income that hasn’t been taxed yet. By contributing pretax dollars, you reduce your taxable income for the year.

How It Works

✅ Contributions are made before income taxes are taken out.
✅ You get an immediate tax break because your taxable income is reduced.
✅ Money grows tax-deferred until you take withdrawals in retirement.
✅ Withdrawals in retirement are taxed as ordinary income.

✏️ Hypothetical Example:

If you earn $120,000 and put $20,000 into a pretax 401k, your taxable income is reduced to $100,000. With a Traditional IRA, the deductibility depends on your income level and plan coverage at work.

The money in a pretax account grows tax-deferred. That means you don’t pay taxes each year on investment earnings. Instead, withdrawals in retirement are taxed as ordinary income.

📝 Note: Pretax contributions can lower today’s taxable income, but you’ll need to plan for future taxes when you withdraw.

Roth Contributions

Roth contributions are made with after-tax dollars. You contribute money that has already been taxed, which means there is no upfront deduction.

How it works:

✅ You pay taxes on your full income first.
✅ Contributions are made with what remains after taxes.
✅ The money can then grow inside your Roth account with the potential for tax-free qualified withdrawals.

✏️ Hypothetical Example:

If you earn $120,000 and contribute $20,000 to a Roth 401k or Roth IRA, your taxable income remains $120,000. You’ve already paid taxes on your earnings before contributing.

The main benefit is that qualified Roth withdrawals, generally after age 59½ and after meeting the 5-year rule, are tax-free.

📝 Note: Roth contributions don’t lower taxable income today, but they can reduce your tax burden in retirement if your withdrawals qualify.

Pre-Tax vs Roth Withdrawals

Withdrawals follow different tax and penalty rules for pre-tax and Roth accounts, and these rules can affect how much money you keep in retirement.

Withdrawal Rules

✅ Withdrawals before age 59½ typically face a 10% penalty unless an exception applies.
✅ After age 59½, the penalty no longer applies, but pretax withdrawals are still taxed as ordinary income.
✅ Roth accounts have an extra requirement: in addition to being age 59½, the account must be at least five years old to withdraw earnings tax-free.

📝 Note: This “five-year rule” is especially important for Roth accounts. Even if you’re old enough, withdrawals may not be fully tax-free until the account passes the five-year test.

Roth IRA Special Withdrawal Rule

The Roth IRA stands out because it lets you withdraw contributions at any age without taxes or penalties. This rule applies only to the money you put in, not the earnings.

✅ Contributions: Always available for withdrawal, penalty-free.
✅ Earnings: Must meet both the age 59½ and five-year rule to avoid taxes and penalties.

📌 Also read: Roth IRA Withdrawal Rules & Penalties Explained

Taxes on Withdrawals

✅ Pre-tax withdrawals are always treated as taxable income once taken.
✅ Roth withdrawals are only tax-free if they’re “qualified” (age 59½ + five-year rule).
✅ Qualified Roth withdrawals give you full access to your savings without additional taxes since you already paid tax up front.

How to Choose Between Pre-Tax and Roth Contributions

If your plan offers both pre-tax and Roth options, you don’t have to pick just one. You can contribute entirely to pre-tax, entirely to Roth, or split your contributions between the two. Each year, you’re free to adjust your strategy. The choices you make now don’t lock you in for future years.

The core difference comes down to when you pay taxes.

Contribution limits are the same for both. The only difference is how those contributions affect your current take-home pay. Pre-tax contributions lower your taxable income today, while Roth contributions do not.

It’s also worth considering the growth potential of your investments. Large gains in a pre-tax account may leave you with higher taxable withdrawals later. Roth accounts avoid this by making qualified growth completely tax-free.

📝 Note: The “better” choice depends on your current tax bracket, your expected tax rate in retirement, and how long your money will stay invested. Many savers choose to diversify by using both account types.

Which Retirement Plans Offer Both Pre-Tax and Roth Options?

Several retirement plans give you the flexibility to contribute either on a pre-tax basis or as Roth contributions. The most popular are:

Roth IRA

A Roth IRA is the most accessible option since you can open one on your own. Anyone with earned income may contribute, but eligibility is subject to income limits.

If your income is above these limits, you can’t contribute directly. However, some savers use a Backdoor Roth IRA strategy as an alternative.

Investment choices in a Roth IRA are generally broad, though the IRS prohibits certain assets like life insurance and collectibles. Most custodians focus on traditional investments such as stocks, bonds, and funds. A self-directed IRA may allow alternative assets, but prohibited transaction rules still apply.

Roth 401k

A Roth 401k is tied to an employer. You can’t set one up on your own — it must be offered by the company you work for. Not all employers include a Roth option, so availability depends on your workplace plan.

Investment options are limited to the lineup selected by your employer and the plan fiduciaries. The number and type of choices vary widely across plans.

Roth Solo 401k

A Solo 401k is designed for self-employed individuals or business owners with no employees other than a spouse. Starting in 2025, under SECURE 2.0, long-term part-time employees who work at least 500 hours for two consecutive years may qualify to participate. At that point, the plan would no longer be considered “solo.”

A Roth Solo 401k can offer high contribution limits and more investment flexibility than many employer-sponsored plans, but it depends on the provider and the plan document. Some plans allow participant-directed investments, while others limit choices. Prohibited transactions and asset restrictions (such as collectibles) still apply. Fiduciaries are also required to act prudently when choosing investments.

📝 Note: Whether you choose an IRA, 401k, or Solo 401k, the Roth version gives you the opportunity to lock in tax-free withdrawals later—but availability, limits, and investment flexibility differ across each plan.

Wrapping Up

Both pre-tax and Roth contributions can serve a purpose, and the right choice often depends on how you want to manage taxes over time. Some savers value the upfront tax break of pre-tax contributions, while others prefer the predictability of tax-free withdrawals with Roth. Mixing the two can give you provide flexibility, since it gives you more options for handling income in retirement.

It may also help to revisit your approach as life circumstances change. Shifts in income, tax laws, or retirement goals can all influence which contribution type feels more suitable. Viewing the decision as part of a long-term strategy, rather than a one-time choice, can help keep your savings plan adaptable as you move closer to retirement.

---

Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.

To access investment advisory services through Carry Advisors, you must be a client of Vibes on an eligible membership plan. For more information about Carry Advisors’ investment advisory services, please see our Form ADV Part 2A brochure and Form CRS or through the SEC’s website at www.adviserinfo.sec.gov.