Friday, May 29, 2020

Roth or Pre-Tax 457 contributions

Trying to decide between Roth and a pre-tax contribution?

With a pre-tax election, you make contributions from your pay check BEFORE any taxes are taken out, so you get a tax break up front, helping to lower your current income tax bill and putting more money into your investment account to earn dividends. 

Your money - both contributions and earnings - grow tax-deferred through investment gains over time until you withdraw them. At that time, withdrawals are considered to be ordinary income and taxed at the current rate when withdrawn.

Roth Savings
With a Roth contribution, it's basically the reverse. You make your contributions with after-tax dollars, meaning there's no upfront tax deduction. However, withdrawals of both contributions and investment earnings are tax-free at age 59 1/2, as long as you've held the account for at least five years.

So it all comes down to deciding when it's better for you to pay the taxes - now or later. Click here to calculate estimated differences between saving Roth vs Pre-Tax (traditional).

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