# Lesson 5 - Pre-tax vs. Roth contributions

## Pre-tax vs. Roth contributions

Understanding the differences between the two can help influence how you save.

## Understand different deferral types

The main difference between traditional (pre-tax) and Roth (post-tax) deferrals is the way they’re taxed.

### **Traditional 401(k) deferrals (pre-tax)**

- Pre-tax contributions are made to your 401(k) account _before_ federal and state taxes are taken out.

- Contributions are often set at a percentage of an individual’s salary but can be a predetermined dollar or percentage if your plan allows.

- Pre-tax deferrals delay income tax until distribution, meaning you pay taxes on the deferral and earnings when your funds are withdrawn.

### **Roth 401(k) deferrals (post-tax)**

- Roth contributions are made on an after-tax basis (also known as a post-tax deduction), meaning the total amount you contribute is deducted _after_ federal and state taxes have been taken out.

- Because you already paid taxes on your Roth deferral, it’s not subject to income taxation when withdrawn.

- However, earnings on your Roth contributions may be subject to taxes if you do not meet certain requirements.

## What should you decide?

_Consider your current vs. future tax brackets, if you'll need the money before retirement, and more._

## Three questions to ask

These questions can help guide your thinking on whether you should contribute pre-tax or post-tax deferrals to your 401(k).

**1. Will I be in a higher tax bracket today, or when I retire?**

- _**Today**_ (generally, high earners and older workers): Consider pre-tax deferrals

- _**When I retire**_ (generally, low earners and younger people): Consider post-tax deferrals

**2. Is there a chance I’ll need to withdraw before age 59 ½?**

- _**Yes**_: Consider post-tax deferrals

- _**No**_: Consider pre-tax deferrals

**3. Is there a time (before retirement) when I’ll be making less than I am now?**

- _**Yes**_: Consider pre-tax deferrals

- _**No**_: Consider post-tax deferrals

## Put your money to work

At Human Interest, you can choose pre-tax or Roth contributions—or do a combination of both.