Roth After-tax vs Traditional Pre-tax Contributions Program Recap

Thank you Jerard Gray from Empower for helping to demystify the differences between Roth and Traditional retirement plans.  Not only are there many different types of retirement plans out there (workplace or individual), they may also have traditional and Roth designations that can dramatically affect your contributions, taxes, and withdrawals.  Its never too early to start planning for retirement so let’s invest some time and learn how to determine which plan might be right for you.

Basic Information – Contributions

There are so many different types of retirement accounts – IRAs, 401(k)s, 403(b)s, 457s, pensions, etc.  While there are minor differences between the types of plans, there is a significant difference between individual retirement accounts (IRAs) and workplace retirement plans – contribution limits.  For individual accounts, whether traditional or Roth, the combined contribution limit in 2024 is $7,000 for those under 50 years of age and $8,000 for those 50 or older.  In contrast, the combined limit for workplace plans is $23,000 for those under 50 years of age and $30,500 for 50 or older.  If you are enrolled in a 457 Catch-Up plan, the contribution limit is $46,000.  It’s important to keep these numbers in mind as you navigate your options for funding your retirement.

Roth vs. Traditional

The major difference between traditional and Roth retirement plans is when the contribution occurs to the plan.  In traditional plans, money is contributed before taxes are paid on it.  In Roth plans, you contribute after-tax dollars to the plan.  As a result, when you finally withdraw money from traditional plans, you must pay tax on the withdrawn amount at your current tax rate; if you have a Roth account, since that money was technically already taxed when you put it in, you do not have to pay any taxes on withdrawals, even investment earnings.  However, there is a caveat that investment earnings in a Roth account must be considered “qualifying” in order to avoid paying taxes.  A withdrawal is on investment earnings is considered qualified when:

• that money has 5 calendar years of participation in the retirement plan
• you are 59.5 years of age or older or disabled or deceased at the time of the withdrawal

If the earnings are not qualified, the withdrawal will be subject to a 10% federal tax penalty.

Another major difference between traditional and Roth accounts is required distributions.  Generally, starting at age 73, individuals with traditional retirement accounts will be required to tax yearly distributions from that account, resulting in yearly tax obligations for those distributions.  Roth accounts, however, do not mandate required distributions, allowing you to keep your money invested should you not need to use it.

Another major difference, specifically for Roth IRAs, there is an income limit on being able to contribute to that account.  If you are single, the modified adjusted gross income limit for the full contribution amount in 2024 is $161,000; if you are married, the limit is $240,000.  If your income is above that amount, you may qualify for reduced contribution amounts.

Questions and Considerations

When determining whether traditional or Roth accounts are best for you, there are some questions you should consider:

• Do you think your tax rate will be higher when you retire than it is now?  If so, you may benefit from putting money into a Roth account so you are paying less tax on that money.
• Can you afford to rake a reduction in take-home pay in order to contribute the same percentage as you would with pre-tax contributions?  You may take home less money in your paycheck because your take-home income will be larger therefore, more will be take out in taxes now.
• Do you want to diversify your tax strategy in retirement?
• Are you prevents from making Roth IRA contributions due to your income?
• Are you will to forgo current tax breaks for tax benefits at retirement?

The following example illustrates the how important the above questions are:

In this example, the take-home pay was reduced by $625 by choosing to contribute to a Roth account. However, when it comes time to withdraw the money, even if the same amount is invested a traditional and Roth account, the total withdraw amount that you can use is significantly greater.

More Information

If you would like more information about your financial situation and whether traditional or Roth accounts are right for you, please contact your financial advisor or Jerard Gray at Jerard.Gray@empower.com.  You can view a recording of this webinar on our YouTube channel at https://youtu.be/P4K2SDYI018.