Deciding whether to contribute to a pre-tax or Roth retirement account is one of the biggest factors when it comes to saving for your retirement. Both offer tax-free compounding, but they differ in when and how you’ll get taxed on your income.

Some retirement plans, like the IRA, 401k, and solo 401k, offer both a pre-tax and Roth option. If you have the ability to choose which account to make contributions to, here’s how to decide which one is right for you.

What’s the difference between a pre-tax and Roth contribution?


Like the name suggests, pre-tax contributions (also referred to as traditional contributions) are made with pre-tax dollars. Put another way, you’re contributing money to your retirement plan with income that you haven’t paid taxes on. Instead, the money that gets contributed gets deducted from your taxable income for the year.

For example, if you make $120,000 this year and decide to contribute $20,000, your new taxable income is now $100,000. The $20,000 gets deposited into your pre-tax retirement account, where it can be invested and grow with tax-free compounding until retirement.

However, because you didn’t pay any taxes when you contributed, your withdrawals in retirement are taxed as regular income.


On the other hand, Roth contributions are made with after-tax dollars, and are oftentimes referred to as “after-tax” or “post-tax” contributions. With Roth contributions, you’re contributing money with income that you’ve already paid taxes on. Unlike a pre-tax contribution, you get no tax deductions when you contribute.

For example, if you make $120,000 this year and decide to contribute $20,000 to a Roth account, your taxable income is still the full $120,000. You contribute money to your retirement plan after paying taxes on the full amount of income. Like a pre-tax account, your money gets deposited into your Roth account, where it can be invested with tax-free compounding until retirement.

The biggest advantage of a Roth contribution is that withdrawals in retirement are completely tax-free.

Pre-tax vs Roth withdrawals

Withdrawal rules

For both pre-tax and Roth retirement accounts, the age you can start to make withdrawals without any penalties is 59½. If you withdraw earlier, you’ll be hit with a 10% early distribution penalty plus income taxes.

Roth retirement accounts have an additional 5 year rule for making withdrawals. In addition to being at least 59½ years of age, your Roth retirement account must be at least 5 years old in order to withdraw without penalties. At least 5 years must have passed since your first contribution to your Roth account.

Roth IRA special withdrawal rule

The Roth IRA is the only retirement account that has a special withdrawal rule. You’re allowed to withdraw your contributions made to your account at any age without any penalties or fees. Even if you’re under the age of 59½, and your account is younger than 5 years old, you can still withdraw contributions at any time.

Only contributions can be withdrawn. To withdraw any earnings from your Roth IRA, you must be at least 59½ years old and pass the 5 year rule.

Taxes on withdrawals

If you’re at least 59½, withdrawals are considered qualified distributions and there is no 10% penalty for both pre-tax and Roth retirement accounts. Qualified distributions from pre-tax retirement accounts get taxed as regular income based on your tax bracket and tax rates at the time of withdrawal. Qualified distributions from Roth retirement accounts are completely tax-free since you already paid income taxes when you made your contributions.

How to choose between pre-tax and Roth contributions

First, understand that if you have the option to choose between pre-tax and Roth contributions, you’re allowed to mix and match between the accounts. You can make your entire contribution as pre-tax, as Roth, or allocate some money to pre-tax and the rest to Roth. You’re also allowed to choose which accounts to contribute to each year. Your decisions this year do not affect your contribution allocations for upcoming years.

The decision ultimately comes down to whether you want to pay taxes now or later. If you’re in a high tax bracket today, but don’t think you’ll be in a high tax bracket in retirement, it may make more sense to defer taxes until the later stages of your career. If you’re in a low tax bracket today, but believe you’ll be in a higher tax bracket in retirement, it may make sense to get taxes out of the way today.

A pre-tax contribution typically allows you to contribute more money since you don’t have to pay any taxes on your income. However, if you expect substantial gains from your investments, you could end up owing more taxes in retirement than if you had paid them today. Roth accounts are the more suitable vehicle for high-risk, high-return investments since any substantial gains will result in zero taxes owed.

Which retirement plans offer both pre-tax and Roth options?

The most popular retirement plans that have both pre-tax and Roth options are:

A Roth IRA is most accessible since anyone with earned income can contribute to a Roth IRA, as long as their income doesn’t exceed the income limit of $144,000 for 2022. If your income is over the limit, you cannot contribute to a Roth IRA and would need to try a backdoor Roth IRA instead.

A Roth 401k is employer-sponsored and is not always available. It’s completely up to the company you work for whether they want to offer a Roth version of their 401k plan. In other words, you cannot get a Roth 401k on your own, you must work for a company that offers one for their employees.

Like a Roth IRA, you can open a Roth solo 401k on your own rather than depending on an employer. However, a Roth solo 401k has some additional eligibility requirements. You must have self-employment business activity without any full-time W-2 employees that work over 1,000 hours per year in your business (excluding your spouse).

If you qualify for a Roth solo 401k, it’s the most flexible out of the 3 options.

With a Roth IRA, you’re typically limited to investing in traditional assets like stocks, mutual funds, bonds, and ETFs. If you want to invest in alternative assets, you’ll have to open a self-directed Roth IRA.

With a Roth 401k, you’re limited to whatever investment options that your employer has set up in their 401k plan. Usually, it’s a small list of around a dozen mutual funds.

With a Roth solo 401k, you have checkbook control over your investments. You can invest in any asset class including alternative assets like real estate, crypto, and even private equity.