Not all 401(k) plans or other employer qualified employer retirement plans allow for participants to make Roth contributions to them, but it seems that this option is becoming more widely available. Lately, I have been getting more and more questions from clients regarding whether it makes more sense for them to make traditional, pre-tax, contributions to their employers’ 401(k) plans or if they would be better off making Roth, or after-tax, contributions. The easy answer is that it ultimately comes down to personal preference, and while most people like the idea of reducing their current tax liability by making pre-tax contributions, it’s important to think ahead about your future tax liability in retirement.
There are a number of things to consider when deciding between making pre-tax contributions and Roth contributions, and while this is by no means an all-inclusive list, here are three things I find that people tend to overlook.
Overall, when it comes to deciding between making pre-tax contributions or Roth contributions (or both!) to an employer’s retirement plan, there is not a single answer that is right for everyone. This is certainly something worth talking through with your advisor as you weigh the different benefits of each. Regardless of which route you decide to take, remember that actively deciding to contribute to your plan and save for retirement is what is really important at the end of the day.