Roth IRA vs. Pre-Tax Contribution: What’s The Difference?

It's about more than just taxes

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Instead of being funded with pre-tax contributions, Roth IRAs are retirement accounts that you fund with after-tax dollars in exchange for tax-free distributions. Distributions from pre-tax contribution plans, like a traditional IRA or 401k, are taxable.

The contribution type that works best for you depends on what plans your employer offers, how much you can contribute, and tax rates.  Here’s how you can compare the two options.

What’s the Difference Between a Roth IRA and a Pre-Tax Contribution Plan?

The difference between Roth IRAs and pre-tax contribution plans is not limited to the tax treatment of contributions and withdrawals.

  Roth IRA Pre-Tax Contribution Plans
Contributions Funded with after-tax dollars, so no tax deduction for contributions Contributions are tax-deductible
Distributions Distributions are tax-free Distributions are 100% taxable
Required Minimum Distributions (RMD) None while owner is alive RMDs begin at age 72
Plan Ownership Individually owned Individually owned or employer sponsored


Roth IRA contributions are made with money you’ve already paid tax on, which means that you have less money to invest compared to pre-tax contributions, which is untaxed money. 

For example, a $6,000 contribution to a pre-tax retirement plan is an untaxed contribution and, therefore, its tax- deductible. On the other hand, to make a $6,000 Roth IRA contribution, you’d have to have $6,000 after you paid tax. If you’re in the 24% tax bracket, you have to earn about $7,895 pre-tax to make that contribution. 


Since you’ve already paid tax on the money before you put it in a Roth IRA, plan distributions are tax-free. No tax is paid on your accumulated interest and gains if you meet certain criteria. Distributions that meet Roth IRA criteria are called qualified distributions

If you take distributions before the Roth account is 5 years old, or you have not reached age 59 ½,  the gains may be taxable, and a 10% penalty may apply.

On the other hand, distributions from pre-tax contribution plans are 100% taxable. All of your contributions, interest, and gains are tax-deferred, meaning you pay taxes when you withdraw money from your plan.

For example, if you are in a 24% tax bracket at retirement, you have to withdraw roughly $46,053 from a pre-tax contribution account such as a 401(k) to have $35,000 to spend. A  $35,000 qualified distribution from your Roth IRA, on the other hand, would be tax-free.

Plan Ownership

A Roth IRA is individually owned.  Other than collectibles and life insurance, you can direct your investments however you like. Pre-tax plans can be individually owned, like a traditional IRA, or they can be sponsored by your employer, like a 401(k). Employer-sponsored plans have higher contribution limits and limited investment menus. The 2022 annual contribution limit to a 401(k) plan is $20,500 compared to the $6,000 contribution limit for Roth IRAs.

Employers can choose to make Roth as well as traditional pre-tax contribution options available in the plans they offer employees. Unlike a Roth IRA, employer-sponsored Roth plans enforce required minimum distributions after a certain age.

Which Is Better For You? Compare With an Example

While there’s no perfect way to predict which is better, Roth IRAs would work best when the tax rates during your working years are lower than the tax rates at retirement. Pre-tax plans would work better when tax rates in the working years are higher than tax rates at retirement.


Pre- and after-tax contribution strategies can have a significant impact on how much your retirement account can grow. Consider an example of a 30 year old in a 24% tax bracket who contributes $6,000 per year to a Roth IRA. The Roth IRA account will have $708,725 at age 65. 

In a pre-tax plan, the contribution is $7,894, or $6,000 after tax at a 24% tax bracket. A fair comparison should include the $1,894 of tax savings in the pre-tax contribution. So consider the same person instead who contributed to a pre-tax 401(k) plan which has a higher contribution limit.

Simply because you’re investing a higher amount, at age 65 the 401(k) account balance is $932,533. The 401(k) account has $223,808 more than the Roth IRA. 

Other factors remaining constant, you can visualize how your investments could grow over time using a compound interest calculator.


Now let’s compare the two plans in the context of you withdrawing $50,000 of retirement income at different tax rates. The figures in the table below are based on an assumption that tax rates increase as your income increases with age.

Tax Rate Roth IRA Withdrawal Pre-Tax Plan Withdrawal
15% $50,000   $58,824
24% $50,000 $65,789
30% $50,000 $71,429

If the Roth IRA withdrawals meet the rules, there will be no taxes to be paid on the distributions. On the other hand, from the pre-tax 401(k) plan the withdrawals would be taxed. Therefore, to get $50,000 in hand, the withdrawal from the account would need to be higher depending on the tax bracket.

Here’s what the account balances look like 20 years later at age 85 after annual $50,000 distributions, assuming a 6% rate of return.

Tax Rate Roth IRA Balance At 85 Pre-Tax Plan Balance At 85
15% $323,341 $697,070
24% $323,341 $425,449
30% $323,341 $205,565

At the lower tax rate at retirement of 15%, the pre-tax plan balance is $373,728 more than the Roth plan balance. At the higher tax rate of 30% at retirement, the pre-tax plan balance has less money than the Roth IRA plan.

A Best-of-Both Worlds Option

You don’t necessarily have to choose between a Roth IRA or a pre-tax retirement plan. 

Depending on your income, a Roth IRA may be available even if you are already contributing to an employer-sponsored ‘pre-tax’ plan.

If you’re married filing jointly, you can contribute to a Roth IRA if your income is less than $214,000. The limit for individuals is $144,000. Making both Roth and ‘pre-tax’ contributions may be a good overall strategy for your retirement plan. 

The Bottom Line

Predicting future tax rates is unpredictable, especially if retirement is many years away. Besides tax rates, here are some other considerations that may help you decide if you should opt for a Roth IRA,or a pre-tax retirement plan, or perhaps both.

What Does Your Employer Offer?

If your employer offers matching contributions, it makes sense to contribute as much as you can to the plan. If you choose a Roth option, your contributions will be allocated to the Roth plan, however your employer contributions will be allocated to the pre-tax plan.

How Much Can You Contribute?

If you can’t contribute the maximum to your employer sponsored plan, a pre-tax option may be a better choice because you’re investing the tax savings. Regardless of future tax rates, you’ll still have more money in your retirement account.

Article Sources

  1. Internal Revenue Service. “Roth Comparison Chart.”

  2.  Internal Revenue Service. “Publication 590-B (2020), Distributions From Individual Retirement Arrangements (IRAs)."

  3. Internal Revenue Service. “IRA FAQs.”

  4. Internal Revenue Service. “Amount of Roth IRA Contributions That You Can Make for 2022.”