One of the most common retirement planning questions is:
Should I contribute to my 401(k) pre-tax or Roth (after-tax)?
The answer is not the same for everyone.
At Plumb Financial, we often say:
“It depends on what you are trying to accomplish.”
One of the most common retirement planning questions is:
The answer is not the same for everyone.
At Plumb Financial, we often say:
“It depends on what you are trying to accomplish.”
Your 401(k) strategy should be based on your current income, your future goals, and what you expect your income and taxes to look like in retirement.
Before deciding which option may be right for you, it helps to understand the basics.
Pre-tax contributions reduce your taxable income today.
That means:
Roth contributions are made with money that has already been taxed.
That means:
If you are early in your career, you may currently be in a lower tax bracket.
You might also expect your income to increase significantly over time.
In that situation:
A Roth contribution may make sense because you are paying taxes now while your tax rate may be lower.
This can help create tax-free income later in retirement when your income could be much higher.
For many people in the middle of their careers, a combination of pre-tax and Roth contributions may work well.
Why?
Because it creates tax diversification.
That means you build:
Having both options can give you more flexibility in retirement and may help you better manage future tax brackets.
The right mix depends on:
If you are later in your career and earning significantly more now than you expect to need in retirement, pre-tax contributions may become more valuable.
In this situation:
Reducing taxable income now could potentially create immediate tax savings.
Later, when you retire and your income decreases, you may withdraw those funds at a lower tax rate.
Some people may also use future Roth conversion strategies as part of a long-term retirement tax plan.
Many employers offer matching contributions to your 401(k).
It is important to know that employer matches are generally made as pre-tax contributions, even if your personal contributions are Roth.
That means:
Understanding how employer matching works is an important part of building a complete retirement strategy.
Retirement planning is personal.
What works well for one person may not work for someone else.
The best strategy depends on:
That is why having a personalized strategy matters.
Your 401(k) is designed to support your future self, and the choices you make today can have a major impact later in life.
At Plumb Financial, we help individuals and families create retirement and tax strategies designed around their unique goals and circumstances.
If you would like guidance on pre-tax versus Roth 401(k) contributions and how to create the right balance for your situation, connect with Plumb Financial. We would love to help you build a strategy for your future.
Starting your first investment account can feel overwhelming.
Questions like:
Where do I start?
What should I invest in?
How much should I contribute?
Am I doing this correctly?
are completely normal.
The good news is you do not need to have everything figured out to begin building wealth.
Now here is the real question:
Can your business actually function without you?
At Plumb Financial, we work with many business owners who have built successful companies—but often, the business still depends entirely on them to operate every day.
If every decision flows through you, your clients only want to work with you, and the business cannot run when you step away, then you may not truly own a business yet.
You may own a job.
One of the biggest concerns many retirees have is taxes.
After years of saving into retirement accounts, many people are surprised to learn that taxes can still play a major role in retirement income planning.
One strategy that may help reduce taxes later in life is a Roth conversion.