Pre-tax vs. Roth 401(k): Deciding which to use for retirement is trickier than you think

Whether you’re starting a new job or updating retirement savings goals, you may need to choose between pre-tax or Roth 401(k) contributions — and the choice may be more complex than you think.

While pre-tax 401(k) deposits offer an upfront tax break, the funds grow tax-deferred, meaning you’ll owe levies upon withdrawal. By contrast, Roth 401(k) contributions happen after taxes, but your future earnings grow tax-free.

Most plans have both options. Roughly 88% of 401(k) plans offered Roth accounts in 2021, nearly double from a decade ago, according to the Plan Sponsor Council of America, which surveyed more than 550 employers.   

While your current and future tax brackets are part of the puzzle, experts say there are other factors to consider.

“It’s hard speaking in broad terms because there are so many things that go into making that decision,” said certified financial planner Ashton Lawrence, partner at Goldfinch Wealth Management in Greenville, South Carolina.

Here’s how to decide what’s right for your 401(k).

One of the big questions to consider is whether you expect to be in a higher or lower tax bracket in retirement, experts say.

Generally speaking, pre-tax contributions are better for higher earners because of the upfront tax break, Lawrence said. But if your tax bracket is lower, paying levies now with Roth deposits may make sense.

Lawrence Pon, a CFP and certified public accountant at Pon & Associates in Redwood City, California, said Roth 401(k) contributions are typically good for younger workers who expect to earn more later in their careers.

“If you’re in the 22% or 24% bracket or lower, I think the Roth contribution makes sense, assuming you’ll be in a higher bracket upon retirement,” he…