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Roth vs. Traditional Contributions: Retirement Planning
When contributing to an employer offered retirement plan, an important choice you will need to make is whether to contribute on a Traditional or Roth basis. To figure out which option aligns best with your financial goals, consider these key factors.
Options Based on Tax |
Traditional Contributions |
Roth Contributions |
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| Pre-tax dollars This lowers your taxable income for the year, potentially reducing your tax bill. |
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| After-tax dollars This has no effect on current adjusted gross income. |
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Withdrawals taxed as ordinary income in retirement Taxes will be owed on your contributions and earnings when you withdrawal. |
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Qualified withdrawals are not taxed Withdrawals are tax-free, both contributions and earnings . |
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| Pre-tax employer contributions | |
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Which Is Right for You?
Choosing between Traditional and Roth contributions depends on your current and expected future finances. Consider these points:
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Tax Bracket
Traditional: Good if you’re in a high tax bracket now but expect a lower one in retirement. You lower your taxable income today and pay less tax later.
Roth: Better if you’re in a low tax bracket now but expect a higher one later. You pay tax now at the lower rate, with tax-free withdrawals later. -
Flexibility in Retirement
Roth accounts offer tax-free withdrawals, giving you more flexibility when you need access to savings in retirement. - Contribution Limits
You can make both Traditional and Roth contributions in the same year if your total stays under the annual limit. For 2025, the 401(k) limit is $23,500. If you’re 50 or older, you can make additional catch-up contributions.
Elective Deferrals 401(k), 403(B), 457:Contribution limit is $23,500
Catch Up (age 50+) is $7,500
Catch Up (age 60 - 63) is $11,250
Roth or Traditional contributions is a personal decision, influenced by factors like current tax situation, retirement goals, and expectations for future tax rates. Regardless of which option you choose, understanding how these contributions function will empower you to make informed decisions that will help you achieve financial security during retirement.