Pre-tax or Roth contributions to your Texa$aver 401(k) or 457: A quick look at the differences

2-minute read

Making regular contributions to your Texa$aver 401(k) and/or 457 account is a great way to build up an income source that will supplement your pension and Social Security benefits in retirement.

But did you know that your Texa$aver Program account may allow you to make different types of contributions?

Some plans allow for both pretax and Roth contributions. It’s important to understand the differences between the two so you can maximize the advantages that your plan offers.

Pretax contributions

Pretax (sometimes called “traditional”) contributions come out of your paycheck before your taxes are calculated and deducted. This may mean that you pay less in taxes because your contributions lower the amount of income on which you owe taxes. Any earnings your contributions generate are also reinvested in your chosen investment options on a tax-deferred basis. In other words, you don’t pay taxes on your initial contributions or on their investment earnings until you make a withdrawal.

Roth contributions

With Roth contributions, your contribution comes out of your paycheck after taxes have been deducted. As with pretax contributions, any earnings from your investments are reinvested in your investment options. However, you will not pay taxes on your contributions or earnings when you make a qualified distribution (as long as you’ve held your account for five years and reached age 59½, or upon death or disability).

How should you choose?

So, why would you choose one type of contribution over another? There’s no single answer. Everyone’s situation is different. For example, you may expect your tax rate to be higher in retirement than in your working years, in which case it may be to your advantage to choose Roth contributions. If you expect your rate to be lower, pretax contributions may be the better choice.

The good news is that you don’t have to choose between pretax and Roth contributions. You can make both types of contributions and then take distributions based on how your finances evolve in retirement. Meet with your local Texa$aver Retirement Plan Advisor to better understand the differences between pretax and Roth contributions and which option (or whether both) may be best for you.