Roth Contributions: Confusing Name, Cool Tax Strategy for Some Savers
Ah, taxes. Gotta love ’em. 🫠
Uncle Sam is getting his cut eventually—but with your retirement plans, you get to decide when.
That’s where Roth contributions come in.
Roth vs. Pre-Tax (In Plain English)
When you contribute to your retirement plan through work, you have two choices:
Pre-tax (Traditional): Skip taxes now, pay them later.
Roth: Pay taxes now, never pay them again on that money.
Think of Roth contributions as a legal tax dodge. You’re choosing to settle up with the IRS today so future-you can enjoy tax-free withdrawals in retirement.
You may also have heard of a Roth IRA (Individual Retirement Account). That’s a savings tool available to you outside of your workplace retirement account that has the same tax benefit: pay taxes now on money you put in (up to the federal limit) and don’t pay them when you withdraw money in retirement.
Note: The IRS limits WHO may contribute to a Roth IRA without tax consequences. In your workplace retirement plan (401k/403b), you may choose between pre-tax and Roth regardless of your income.
So… Who Should Consider Roth?
Roth contributions can be a great option if:
You’re early in your career and not yet in your highest earning years.
You’re in a lower tax bracket now and expect to be in the same or a higher one later.
You’re a high saver in the 24% tax bracket or lower and already maxing out retirement accounts.
On the flip side, if you’re in a very high tax bracket (32% or higher) or working to lower your taxable income for student loan payments, pre-tax contributions often make more sense.
The Good News: This Isn’t a Forever Decision
Choosing Roth doesn’t lock you in for life. You can switch to pre-tax later as your income grows. In fact, having both gives you flexibility in retirement—one bucket Uncle Sam will tax and one he won’t touch.
Bottom Line
Roth contributions are all about timing. If you’re paying relatively low taxes today, it might make sense to get them out of the way now and enjoy tax-free withdrawals later.
Uncle Sam gets paid either way. You just get to decide when.
And, finally, why the heck do we call them Roth contributions?
They were introduced as part of the Taxpayer Relief Act of 1997, and Senator William Roth was a key architect of that bill.
Want help to determine if Roth contributions are right for you? Meet with a money coach to learn more.