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What’s the Difference Between Pretax and Roth Contributions?

Learn how contributing after-tax funds to a Roth has advantages in retirement

Choosing the right type of tax advantage for your retirement savings plan can have a significant impact on your return on investment (ROI) and current budget.

Some retirement plans offer tax advantages by allowing you to deduct the contributions from your taxable income for the year when you make them. With other plans—typically Roth individual retirement accounts (Roth IRAs) or Roth 401(k)s—you make contributions with after-tax funds. Keep in mind that you're able to make all withdrawals in retirement, including any earnings, tax-free.

Each type of tax advantage has its pros and cons. You can also choose to split your contributions between pretax and after-tax accounts. Learn more about how pretax and after-tax contributions work and which type(s) of retirement plan may be right for your situation. That way, you can better maximize your return and stay in good financial health as you reach your retirement goals.

Key Takeaways

  • Choosing the right retirement account can impact your return on investment and budget.
  • You can make contributions to a tax-advantaged retirement fund with pretax or after-tax income.
  • Traditional individual retirement accounts and 401(k)s generally allow you to deduct your contributions from your taxable income for the year when you contribute.
  • With Roth accounts, you contribute income that has been taxed, but you can withdraw those contributions and their earnings from your account in retirement without paying taxes.
  • You must be at least 59½ years old to withdraw funds from a traditional IRA or 401(k) account with no penalties.

How Pretax and Roth Contributions Work

Whether you make pretax contributions to a traditional account or after-tax contributions to a Roth account, you can enjoy a tax benefit. But what kind of tax advantage you receive will depend on which type of account you choose.

Pretax Contributions

With pretax contributions, your tax advantage is immediate. You can deduct your contributions from your taxable income and lower your tax bill for the year. This can help provide you with the additional cash flow you may need to pay for other expenses.

People who could benefit from an immediate tax break may prefer to make pretax contributions to a retirement account like a traditional IRA or 401(k). Note that when you withdraw your funds in retirement, the money (and everything it earned while it was in the account) is taxed as income according to your income tax bracket at the time.

There’s another point that only applies to traditional IRAs: If you or your spouse has a retirement plan at work, the tax deduction for contributions may be limited to or unavailable if your income is above certain levels. Even if that’s the case, you would still have tax-free growth of your contributions once they are in your traditional IRA until the money is withdrawn.

You cannot withdraw money from a traditional retirement account before you are age 59½ or you will face penalties. You must also start taking required minimum distributions (RMDs) by a certain age. The rules change based on your age:

  • If you turn 73 on or after Jan. 1, 2023, you must begin taking RMDs beginning April 1 of the following year.
  • If you turned 72 between Jan. 1, 2020, and Dec. 31, 2022, RMDs begin April 1 of the following year.

To calculate the difference in savings between a pretax traditional IRA and an after-tax Roth IRA, use one of many free online calculators available from numerous banks and credit unions.

Roth Contributions

With contributions made to Roth accounts, the money is included in your taxable income for that year, so you do not see an immediate tax advantage. However, during retirement, you can make withdrawals from a Roth account tax-free, including any gains that your investments may have made.

For investors with a longer investing horizon or for those who have more time for their investments to grow, a Roth account made with after-tax funds can potentially offer more tax advantages in retirement. After all, even if a portfolio makes significant gains, investors will not have to pay taxes when they withdraw them.

Another benefit: You can withdraw your contributions to a Roth IRA at any time because you have already paid taxes on them. However, you must wait until you are 59½ and had the account for more than five years before you can also withdraw the earnings tax-free. If you make a withdrawal before then, you have to pay taxes on the earnings. What’s more, Roth IRAs do not require any withdrawals until the death of the owner of the account.

Keep in mind there are thresholds that apply. There is, however, a Roth backdoor strategy that does allow taxpayers at all income levels to convert traditional IRA funds to Roths.

Roth IRAs do not have a required minimum distribution during the owner’s lifetime. If you can afford to, you can keep your funds growing tax free until your death, when your account will be cashed out and passed to your heirs.

Advantages and Disadvantages of Pretax Contributions


The main advantage to making pretax contributions to a traditional IRA or 401(k) is that it generally lowers your tax bill for that year. How much you end up saving depends on the amount you contribute and your taxable income bracket for that year.

With accounts that take pretax contributions, you typically must begin to take a minimum distribution starting at age 73 or 72, depending on when you were born. You may get an exception to this rule for just the retirement plan at your current employer if you are still working.


Because you made your contributions using pretax dollars, any money you withdraw during retirement is taxed. The amount you're taxed depends on the tax bracket in which you fall. If you are younger with a longer investing horizon, the savings that you could secure in retirement by contributing to a Roth account now could be substantially more than the savings you would get with pretax contributions.

You can contribute up to $6,500 to a traditional IRA or up to $22,500 to a 401(k) for 2023. The catchup contributions for people ages 50 and older are $1,000 for IRAs and $7,500 for 401(k)s. Keep in mind that there are no income limitations for contributing to a traditional account but the deductibility of traditional IRA contributions can be affected by whether you or your spouse has a retirement plan at work.

  • Lowers your taxable income and annual tax bill

  • Required minimum distributions begin a a certain age

  • Withdrawals are taxed as income

  • Contribution limits

Advantages and Disadvantages of Roth Contributions


The biggest benefit to Roth accounts is that they allow earnings on your investments to grow tax-free. No matter how significant your gains are, you will not have to pay taxes on them when you withdraw the funds in retirement. Getting tax-free income in your retirement years can be a tremendous advantage in helping you pay your expenses.

You can also withdraw any contributions you make to your Roth accounts without any penalties or taxes. Keep in mind that this doesn't apply to the earnings on those contributions. If you withdraw those, you will be taxed and may have to pay a penalty.

Roth IRAs also have no required minimum distributions, as noted below. And, designated Roth 401(k) accounts—unlike Roth IRAs—have no income limitations for participation.


The major disadvantage to contributing to a Roth account with after-tax funds instead of a traditional account is that your tax advantages will be delayed until your retirement years. So, you cannot lower your tax bill for the year when you make the contribution. If you have a tight cash flow and carry high-interest debt, not getting a tax benefit can be a significant downside to contributing to a Roth.

Another potential downside is that Roth IRAs have income limits. For 2023, you must have a modified adjusted gross income (MAGI) of $228,000 or lower for married filing jointly tax filers and $153,000 or lower for single filers. If your income is higher, you cannot contribute.

Designated Roth 401(k) accounts have an RMD as long as you’re not working for that company and are not a 5% owner of the issuing company.

  • Earnings grow tax-free

  • No RMDs

  • Contributions can be withdrawn at any time without any taxes or penalties

  • Certain Roth accounts have no income thresholds to contribute

  • After-tax dollars delays your tax benefits

  • Income thresholds limit who can contribute

  • Designated Roth 401(k)s have an RMD in certain cases

Can You Make Both Pretax and Roth Contributions?

You can make contributions to both a pretax traditional account and a Roth account in each category but your total contributions must not go over the (IRS) maximum contribution limits for each type of account. For example, for 2023, you could split the $22,500 contribution limit between a traditional 401(k) and a designated Roth 401(k).

Can You Max Out Both Types of Accounts in One Year?

If you have a traditional and a Roth IRA, you can contribute only up to the total maximum for both accounts combined. So, for 2023, the most that an individual can contribute is $6,500. This means you can contribute $3,250 to both a traditional and a Roth IRA but you cannot contribute $6,500 to both. In addition, you could also max out the approved contribution amount, splitting them between traditional and designated Roth 401(k)s.

Can You Switch a Traditional IRA to a Roth IRA?

Yes, you can roll funds from a traditional IRA into a Roth IRA. This can be a good strategy if you expect your tax bracket to be higher in the future. Keep in mind, though, that you’ll owe tax on any amount that you convert and the bill can be high. You may want to consult a tax advisor before enacting this strategy.

The Bottom Line

The key to saving for your retirement is to start as soon as possible. Choosing the right type of retirement plan, whether it’s one using pretax money or after-tax contributions—or both—can help you meet your financial goals. Consider consulting a financial professional for guidance on which type of plan best suits your needs.

Article Sources
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