Roth Vs. Pre-Tax 401(k)
If you’ve ever wondered whether to choose Roth vs. pre-tax 401(k), you’ve probably seen a lots of different opinions! And not a lot of clarity.
The right answer depends on how your taxes actually work, not what someone else is doing.
Roth vs. pre-tax 401(k) is one of the most common decisions investors face.
And the entire “Roth vs. pre-tax 401k” is also one of the most over-simplified discussions as well.
It may be straightforward for your buddy – but more nuanced in your situation.
There is no “blanket” or “bumper-sticker” right answer.
Tom walks through how the choice actually works in practice, focusing on:
- tax brackets,
- marginal vs. effective tax rates, and
- how retirement withdrawals are taxed.
Using an example, we illustrate how contributing to a Roth vs. pre-tax 401(k) during higher-earning years can reduce current taxes.
But we also show how distributions in retirement may be taxed at a lower effective rate than many expect.
Still, we meet with many who are preparing to retire and most of their assets in non-taxed retirement accounts. This is where the discussion of Roth vs. pre-tax 401(k) comes into discussion 9again).
At the same time, Roth contributions can play a role in specific situations, particularly when income is lower or flexibility is a priority.
Rather than treating Roth vs. pre-tax 401(k) as a fixed decision, we discuss how timing, income levels, and withdrawal strategy shape the outcome. The goal is not to point to a universal answer, but to provide a framework for evaluating how each option may fit within a broader financial plan. There is no “blanket” answer when it comes to Roth vs. pre-tax 401(k).
Take-aways:
- The “Roth vs. pre-tax 401(k)” decision depends on your current and future tax context
- Marginal tax rate is a key input when evaluating contributions
- Effective tax rates matter when evaluating distributions
- Retirement withdrawals are often taxed differently than expected
- Roth vs. pre-tax 401(k) accounts can serve a purpose in a coordinated strategy
Roth Vs. Pre-Tax 401(k) – Links
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Roth Vs. Pre-Tax 401(k) – Transcript
If you’ve ever Googled, “Roth vs. traditional 401(k)?”
Then you’ve probably found a hundred different opinions online…….and walked away more confused than you did before you started.
Here’s the most important thing that I can tell you:
There is no universal right answer.
Not for you.
Not for anyone.
Because your tax situation, your income, your retirement timeline, your spending plans……. they’re yours!
And the decision that may make sense – for your next door neighbor – or your coworker in the break room, – or the person in the comments section who is “1000% sure” they’ve got the right – and only – answer.
That may not make sense for you at all.
What I CAN do is walk you through how the math works, here in 2026.
So you can really understand what’s happening with your dollars.
And explain why this is EXACTLY the kind of question…… the kind of scenario, that’s worth walking through with your financial planner — who knows your full picture.
Let’s start with something I see a lot.
People at higher income levels are choosing to contribute money to a Roth retirement account.
When, if they actually ran the numbers, they may be locking in a higher tax rate today than what they might be facing in retirement.
It’s not because they’re making a careless decision!
Because while it seems like the “conventional wisdom in 2026” that you should “always go Roth because taxes are always going up.”
That kind of line gets repeated so often that people start to feel like that’s a fact!
And it may not be.
Here’s what the decision actually looks like during your working years.
The federal tax system is progressive.
What that means is you’re not paying one flat tax on everything that you earn.
You pay different rates of tax – as you work your way – climbing up through the tax brackets.
So when you’re trying to decide where to direct your retirement dollars to, what matters most – is your “marginal” tax rate.
Not your effective rate, but your marginal tax rate.
That’s the rate on the very next dollar you are going to earn.
Because it sits on top of everything else that you’ve already earned this year.
Let’s go through an example, of a married couple filing jointly, with two incomes.
That next dollar – to decide whether should it go into Roth or pretax 401(k)…… that might be in the 32% tax bracket.
What that means is for every $1,000 dollars that you put into a pre-tax retirement account, that actually saves you $320 in taxes.
That’s real money.
So here’s where things start to get interesting.
And where, a lot of assumptions start to break down.
When you’re in retirement…… you’re no longer making decisions about “one more dollar” of earnings.
You’re deciding how much to pull from your accounts for the entire year.
And your effective rate……. prior, we talked about your marginal rate.
Now when you’re retired, your effective rate, what you’re paying across that entire withdrawal — is often lower than what people may expect.
And I want to walk through an example.
Okay, before we get into the numbers, it’s important that you know upfront that this example that I’m going to walk through shows a couple with no other taxable income.
So there’s no pension coming in, there’s no big dividends coming in.
There’s no social security, at the time.
In reality, if those kind of things were in the picture, the math is going to change!
And that’s exactly why we keep coming back to this point: that every situation is going to be different.
So with that said, let’s take a look at a married couple who are pulling $150,000 a year from their pre-tax 401(k).
All this money coming out is going to be taxable income.
Every dollar of it.
So let’s go through the math.
The first $32,200 that comes out is without taxes. That is covered by your standard deduction.
So you are not going to be taxed on that first $32,200 in 2026.
The next $24,800 is taxed at a 10% rate, so $2,480 in taxes.
The next $76,000 falls into the 12% bracket.
So the tax on that bracket is $9,120.
So far we’ve accounted for the first $133,000 of the $150,000 that we’re taking out of a pre-tax retirement account this year.
The remaining $17,000 …..that gets taxed at 22%, the 22% tax bracket.
So that’s a tax of $3,740 on that last $17,000.
Add it all up.
The total federal tax on $150,000 distribution from a retirement plan (in this case) is approximately $15,340.
When you do the math, the effective rate is 10.2%.
These folks didn’t pay 32% on those dollars – because that money went into a retirement account, pre-tax.
When they made the contribution, they were contributing when their next dollar of earnings (which) would’ve been taxed at 32%.
And they’re withdrawing at 10.2.
So, “in at 32, out at 10.2.”
Okay. But you may be saying to yourself, “alright, but what if taxes do go up?”
That’s a real thing.
It’s a real concern and it’s worth talking about.
But here’s the context I think gets left out of most conversations.
For the whole story of “rates are going to go up in the future” — for that to actually drastically change the math.
I want you to just look at some things…….
Their effective retirement tax rate would need to just about triple.
From 10% on the way out …..to something that meaningfully exceeds 32% that they didn’t pay – on the way in.
So your effective tax rates would have to go from 10% to something much, much higher.
I mean, even if you rolled back to where tax rates were before the 2017 tax cuts, the TCJA, the Tax Cuts and Jobs Act…… even if you were to roll back to those kind of numbers……. your tax rate on the, on that distribution would’ve been around 15%.
Instead of something a little over 10% today.
Still well below the 32% marginal rate that they faced while they were working and contributing.
It doesn’t mean that this concern is not valid.
It is, I mean – they have to do SOMETHING with these taxes.
It just means that this is a variable.
And it needs to be modeled – for your situation.
There’s no blanket right answer for these kinds of questions.
So let’s be clear that Roth contributions absolutely make a lot of sense – in the right set of circumstances.
For example, early in your career when you’re in a lower tax bracket, it makes sense to really consider putting money into a Roth retirement account.
Or say there’s years where your income drops – on a temporary basis.
Or a strategic period of time where you’re going to do Roth conversions, where your income has dropped.
…..maybe you just retired and you haven’t started taking out distributions.
These are the kind of opportunities where you can really take advantage of being in a lower tax bracket.
And making an effective use of putting money across the table — from pre-tax into post-tax Roth accounts.
So we see folks all the time who are preparing to retire. And they’ve got $2.5 or $3 million bucks, sitting in pre-tax retirement accounts.
But they don’t have six months of cash in the bank.
That’s going to be a problem.
The question really isn’t whether to put money into a Roth account or say “out of” pre-tax accounts.
It’s…..
When to do it.
It’s how much to do it.
And in what kind of sequence.
That’s where the nuance really lives.
Which brings me back to where we started.
There’s no single right answer to the “Roth vs. pre-tax 401(k)” retirement plan question.
The math is real.
But the math only tells you something useful when it’s applied to your situation.
To your numbers.
Your income.
Your tax bracket.
Your expected retirement spending.
And your timeline.
That’s EXACTLY the kind of scenario to discuss with your financial planner, someone who can look at your full picture and help you think through the sequencing and not just hand you a “bumper sticker” kind of answer.
So look, if this raised questions about your own situation………good!
That’s the whole point of this video.
Take those questions to someone who can actually help you walk through the scenarios.
It’ll be worth it.
Thanks for watching “Roth vs. Pre-tax 401(k)”
