Is a Roth IRA a Pre-Tax Investment?

Learn how taxation on a Roth IRA account works

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Roth IRAs (individual retirement accounts) are designed to offer tax advantages that will help you in retirement, but you don't contribute pre-tax funds to them. Contributions to Roth IRAs must come from taxed income, but then you can make withdrawals tax free in your retirement years, including your earnings. 

Let’s take a look at how taxation works with contributing to and withdrawing from Roth IRAs, as well as how taxes apply to other types of retirement accounts.

Key Takeaways

  • Roth IRA contributions are made with after-tax funds, not pre-tax funds. 
  • You can use pre-tax income to contribute to traditional 401(k) and traditional IRA accounts. 
  • Roth IRA accounts offer tax advantages in your retirement years when you can withdraw your contributions and any earnings tax free.   
  • After-tax investments can work best if you have a good many years remaining until your retirement.

Roth IRA Contributions Aren't Pre-Tax

Roth IRA contributions are made with income that's already been taxed. Your contributions are not tax deductible, so investments in these accounts are not considered to be pre-tax investments.

Qualified distributions are those that meet certain requirements, such as if you receive them after retirement age, which the Internal Revenue Service (IRS) sets at 59½. You can also receive qualified distributions if:

  • You’ve held the account for more than five years.
  • You're disabled.
  • Distributions are made to a beneficiary.
  • You were affected by a qualified disaster.
  • You're using the money to build or buy your first home (up to $10,000).


The tax benefit of a Roth IRA is that you don’t have to pay tax on any dividends or capital gains in the account while you're saving for retirement or on qualified distributions. 

You must pay a 10% penalty if you take a nonqualified distribution, but this only applies to your investment earnings, not to the money you originally contributed. Contributions to a Roth IRA can be withdrawn at any time because you've already paid tax on that money.

Keep in mind that the IRS places limits on how much you can contribute to IRAs. As of 2022, you can contribute $6,000 per year or $7,000 if you're over 50. The changes these contribution limits periodically, but not necessarily every year. They do increase to $6,500 and $7,500 in 2023, however.


The IRS also imposes an income limit on Roth IRA contributions. You can't contribute if you earn too much. Your modified adjusted gross income (MAGI) must be $214,000 or less if you're married and filing a joint tax return for tax year 2022, or $144,000 if you're a single taxpayer or head of household filer. These limits increase to $228,000 and $153,000 in 2023.

One way to get the benefits of a Roth IRA if your income is too high to contribute is to use a Roth conversion or “backdoor” strategy. Retirement accounts such as 401(k)s or traditional IRAs can be converted to a Roth even if the account balance is more than the annual contribution limit, although you have to pay tax on the funds in the year of the conversion.

How Pre-Tax Retirement Accounts Work

You have several options to consider if you’d prefer the tax advantages of a pre-tax retirement account. They provide more immediate tax benefits.

A 401(k)

Traditional 401(k) plans. as well as 403(b) and 457(b) plans, are defined contribution plans that are sponsored by employers. The employee makes a contribution into the plan and the employer matches a portion or all of the contribution. Contributions to the plan are pre-tax, so the withdrawals in retirement are subject to taxation.


Roth 410(k) plans are employer-sponsored plans in which contributions are made with taxed income, but then the earnings can be withdrawn tax free in retirement.

Traditional IRAs

Traditional IRAs are similar to Roth IRAs in that they're held by individuals, but they take pre-tax contributions. Your distributions in retirement are therefore taxed. Traditional IRAs have the same annual contribution limits as Roth accounts. You must pay income taxes plus a 10% early withdrawal penalty if you withdraw funds early.

Is a Roth IRA the Best Retirement Account for You?

Should you put your retirement savings in a Roth IRA or a retirement account that offers more immediate tax benefits? Let’s go over the pros and cons of each. 

When After-Tax Accounts Work Best

Roth IRAs are generally recommended for younger people who have longer investing and saving horizons. That’s in part because these individuals have more time to establish significant earnings, which they can withdraw tax free in their retirement years. Their longer investing horizon means they can better leverage the power of compounding to help their earnings grow more quickly.


Younger people also generally earn lower incomes than those who are nearing retirement, so their tax rate is lower. They tend to move into a higher tax bracket and their earnings are taxed more as they age and earn more income, so paying taxes now may be more beneficial for them.

Let’s say you make $80,000 per year, which puts you in the 22% tax bracket. The tax would be $1,320 now if you contribute $6,000. You'll have an income of $130,000 in retirement so you'd be in the 24% bracket. You would pay $1,440 on that $6,000. Paying taxes earlier may make more sense for some people. 

When Pre-Tax Accounts Work Best

You may prefer a pre-tax account if you want to take advantage of tax breaks sooner. You may be on a tight budget and need the tax advantage immediately. 

You may also benefit from using a retirement account that takes pre-tax funds if you're earning a significant amount of money now and expect to earn much less in retirement. 

The Best of Both Worlds

You can consult a financial advisor for guidance on your personal situation if you're not exactly sure what type of account is best for you. They might recommend one type of retirement account or they might suggest that you split your money and contribute to both. You can invest in a Roth IRA to grow earnings for future tax-free withdrawals while also contributing to a 401(k) plan at work to take advantage of matching funds.


No matter which strategy you choose when it comes to retirement savings, the earlier you start, the better. 

Non-Qualified Retirement Accounts

Qualified retirement accounts offer incredible tax benefits, but you can also use other types of investment accounts toward saving for retirement. Investing using traditional brokerage accounts that have no tax breaks allows you to remove the money without early penalties. You can also invest more because there are no contribution limits. 

You may need more money to fund your retirement than what you can save in a tax-advantaged retirement account like a Roth IRA. You’ll build up your savings if you invest in a side account while also keeping money liquid if you want it to invest in a business or real estate. 

Frequently Asked Questions (FAQs)

How much tax do you pay on a Roth conversion?

Roth conversions are taxed at your marginal income tax rate. You’re required to report the full account balance as income on your tax return in the year that you do the conversion. You can do the conversion over several years to limit each year’s tax payments. This is especially helpful if you know the years in which you'll have higher income.

How does a Roth IRA affect your tax return?

A Roth IRA would only affect your tax return if you do a conversion in that tax year or make a nonqualified distribution. You would report the amount on your tax return in these cases. The conversion would be taxed at your marginal rate and the distribution would have a 10% penalty.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)."

  2. IRS. “Retirement Topics - IRA Contribution Limits.”

  3. IRS. "Amount of Roth IRA Contributions That You Can Make for 2023."

  4. IRS. “Amount of Roth IRA Contributions That You Can Make for 2022.”

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