May 6, 2025 | 6-7 Minute Read
When an individual decides to contribute to their employer’s 401(k), 403(b), or governmental 457 retirement savings plan, one of the first decisions that they have to make is whether their contributions, and in some cases their employer’s contributions, are going to be made on a Pre-Tax or Roth basis.
The Basics
When it comes to these two different types of contributions, it is all about timing. With Pre-Tax Contributions (traditional), as the name suggests, contributions go into the retirement plan before being subject to federal income and most state taxes*, but are taxed, along with their earnings at the time they are withdrawn. With Pre-Tax contributions, an employee can lower what they pay in taxes in the year that the contributions are deducted from their pay. With Roth (named after Senator William Roth), contributions go into the retirement plan after being subject to federal and state income taxes, but those contributions and their earnings can be withdrawn tax free, if the following two requirements are met:
- The participant has reached age 59 ½ (there are exceptions for disability or death); and
- The first Roth contribution into their retirement account was made more than 5 years ago.
The advantage with Roth is that you are not taxed again on your contributions and if the above requirements are met, earnings are not taxed.
For Retirement Plan Savers
Retirement plan savers who expect their tax rate to be lower in retirement may elect to make their contributions on a pre-tax basis, allowing them to defer taxes until their rates are smaller. Other retirement plan savers who expect their tax rate to be higher in retirement may elect to make their contributions on a Roth basis, allowing them to pay taxes now, before their rates are higher. Depending on their expected tax rates in retirement, these strategies can be used to save money by paying taxes when their rates are lowest.
Another consideration for savers is what they think the ratio between their contributions and the earnings on those contributions in their accounts will look like at retirement. For younger employees (who often earn less than they will later in their careers), they have more time for the earnings to grow and compound, creating a higher earnings to contributions ratio. As earnings on Roth are withdrawn tax free (given the above requirements are met), tax liability may be reduced over the course of a lifetime. Employees nearer to retirement (who often are at the peak of their career income), have less time for the earnings to grow and compound, creating a lower earnings to contributions ratio. In this case, there may be more benefit in deferring the tax liability on the contributions by making them on a pre-tax basis.
Pre-tax contributions and Roth contributions in 401(k), 403(b), and governmental 457 plans have a different impact on a saver’s take-home pay. In a pre-tax contribution arrangement, the savings come out before taxes are calculated on the remaining amount/pay, thus a smaller tax withholding. Roth contributions are the opposite, with taxes being withheld on the full salary and contributions being taken from the leftover amount, thus a larger tax withholding. An employee will see greater take-home pay on a pre-tax contribution of an equal percentage than they would see on a Roth contribution. Some savers use this as a strategy, choosing to contribute a higher percentage of their income on a pre-tax basis than they would be able to do on a Roth basis and still meet their take-home pay needs and goals.
Another approach that some savers use is to make both Roth and Pre-Tax contributions at the same time or over different periods of their career. Then at retirement, they mix the withdrawals that they take from those two different money types to stay in a lower tax bracket than if they took all their withdrawals from a pre-tax source (Roth withdrawals are not counted towards your adjusted gross income). Most plans offering employer matching or non-elective (often referred to as profit sharing) contributions only offer those on a pre-tax basis. New legislation, in a bill known as SECURE 2.0, allows employers to offer employees to pay the taxes on these employer contributions in a Roth arrangement. As of the writing of this article, few employers sponsoring an employee retirement plan have made this election, likely due to payroll and investment firm limitations to calculate and track these contributions on a Roth basis.
Beginning in 2026, certain high earners will be required to make their catch-up contributions on a Roth basis. For more information on that, please see our article “SECURE 2.0: Roth Catch-Up Contribution Rules for High Earners Starting in 2026.”
| Consideration | Pre-Tax Contributions May Be Better If… | Roth Contributions May Be Better If… |
|---|---|---|
| Age | You’re closer to retirement (older) and have fewer years for investments to grow | You’re early in your career (younger) and have more years for potential tax-free growth |
| Current Income and Tax Brackets | You’re a high earner in a higher tax bracket now, and expect to be in a lower tax bracket in retirement | You’re earning less and in a lower tax bracket now, but expect higher income and tax bracket later |
| Need for Tax Break Now | You want to reduce your taxable income today | You don’t need a current tax break |
Bottomline, everyone’s situation is different and unless you have a crystal ball and can see the future, consider consulting with your financial advisor or a tax professional for guidance on your situation.
For Plan Sponsors
For employees to be able to contribute on a Roth basis, it must be elected in the Plan Document. If this election has not been made, then the document will need to be amended, or participants will only be able to contribute on a Pre-Tax basis. This is particularly important for participants who are required to make their catch-up contributions on a Roth basis, please see our article “SECURE 2.0: Roth Catch-Up Contribution Rules for High Earners Starting in 2026.”
If the plan offers both methods of contribution, participants must be given the chance to elect how they want to contribute to the plan. For plans that also allow participants to designate their employer contributions on a Roth basis, employees will need to be given the opportunity to make that choice.
Below you will find the order of operation in payroll for both employee Pre-Tax and Roth contributions:
| Employee Pre-Tax Contributions | Employee Roth Contributions |
|---|---|
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|
Benefits² Administrators clients: If you have questions about employee or employer Roth contributions in your plan, we encourage you to reach out to your dedicated Retirement Analyst. They can help you determine if your plan document will need to be amended to allow for Roth contributions. They can also help you determine if you have any participants who need to make their catch-up contributions on a Roth Basis. They can help you better understand the difference between Roth and Pre-Tax contributions and how these contributions are calculated.
For non-clients or plan advisors seeking guidance: Feel free to contact Leslie Wood (lwood@benefits2llc.com) for additional information and support. Leslie can provide an overview of employee or employer Roth contributions, if a plan document needs amended to allow for Roth contributions, or additional strategies for increased retirement savings.
Whether you are a current client or not, our goal at Benefits² Administrators is to ensure every plan sponsor has the knowledge and support to remain compliant and help participants succeed in saving for retirement.
*Please note that in New Jersey and Pennsylvania, state income tax includes deferral contributions in the year that they are made but typically do not tax withdrawals to avoid double taxation.
JP Perryman, QKA
Jeremiah “JP” Perryman, QKA is the Compliance and Operations Manager at Benefits² Administrators. He has more than 15 years of experience working with qualified retirement plans.
MJ Lewis, QKC, QKA
MerriJo “MJ” Lewis, QKC, QKA is a Retirement Benefits Analyst at Benefits² Administrators with more than 7 years of experience working with qualified retirement plans.