Today we’re going to discuss two very common, but critical, questions: Between the pre-tax and Roth plan, which is better for you? And what is the best way for you and your employees to contribute?
First, let’s review the difference between pre-tax and Roth plans.
We’ll begin with pre-tax. With pre-tax, the amount you contribute to the plan reduces your taxable income, grows tax-deferred, and then is taxable in retirement when you go to spend it. For an example, imagine that you make $100,000 and contribute 10% ($10,000). Using pre-tax, your taxable income would be reduced to $90,000. The remaining $10,000 would be added to the plan, where it would grow tax-deferred until the funds are distributed upon retirement.
The Roth is the exact opposite. With Roth, you pay taxes on the amount of the contribution, which grows tax-deferred and becomes tax-free when distributed upon retirement. Taking the same example of a $100,000 with a 10% ($10,000) contribution, your current taxable income would remain at $100,000 until retirement—that is, assuming two things: You are at least 59-and-a-half and it has been at least five years since your first Roth deferral.
So which of these two options makes the most sense?
The answer to this depend on your circumstances. A Roth plan makes sense if you have a while to go before you retire, and are in a lower tax bracket than you expect to be once you reach that point.
That said, the reason that Roth is not a good idea for most is that, unfortunately, the majority of Americans are behind in their retirement savings. Saving pre-tax will not only help you diversify your future tax liabilities, it is also cheaper and will help you reduce your taxable income now.
There is also the option to do both. You can contribute both pre-tax and Roth, so long as the contribution doesn’t exceed the current limit of $19,000 for those under the age of 50 or $25,000 for those who are older than that.
Our team has the tools and resources to help you and your employees make educated decisions regarding contributions to your retirement plan. The decision between pre-tax and Roth is crucial, and will have a significant impact on your current situation and financial future.
If you have any other questions or would like more information, feel free to give us a call or send us an email. We look forward to hearing from you soon.