When will you pay taxes? Roth vs. pre-tax

When it comes to your retirement savings, you can either pay taxes now or you can pay taxes later. That decision can be an important part of choosing which kind of retirement savings account you want to use. There are two options for you to consider:

The “pay now” – or Roth – alternative

With a Roth retirement savings account, you pay income taxes on your contribution before they go into your retirement account. After that, they’re generally tax-free. Your money grows tax-free and, assuming you meet all of the requirements for a qualified withdrawal, you can take both your contributions and any earnings out of your account tax-free at retirement.¹

The “pay later” – or traditional – account

With a traditional retirement savings account, your contribution goes into your retirement account before you pay taxes. In other words, it’s a pre-tax contribution. That means your taxable income is lower, so you pay less current income tax. However, when you take money out of that account at retirement, you will owe income taxes on both your contributions and any earnings.²

Other things to keep in mind

• You may be able to contribute to both. Check with your employer to see if you can take advantage of the benefits each type of account – Roth and pre-tax.
• Your employer may make contributions, too. If your employer matches your contributions or provides a lump sum retirement benefit, this money must be put into a traditional, pre-tax account, even if you choose a Roth account for your contributions.

• You may be eligible for a Roth 401(k) even if you’re not eligible for a Roth IRA. Not everyone is eligible for a Roth IRA. Your eligibility is based on your income. If you make too much money, you may not be able to contribute to a Roth IRA, but you can still contribute to a pre-tax retirement account, such as a 401(k), 403(b) or 457(b) account. There are no income limitations there.

Want to learn more?

Check out some of the other articles in our Retirement Education Center. You may also want to consult with a qualified tax professional.

Tax rates and related legal requirements can be altered at any time by acts of Congress, regulatory authorities, or the courts. Future conditions cannot be guaranteed.

¹ Withdrawals from a Roth account prior to age 59½ or within five tax years of account creation may be subject to ordinary federal income tax, a 10% additional federal tax, and possibly additional state taxes or penalties as well. Limited exceptions are available.

² Withdrawals from a traditional account prior to age 59½ also may be subject to a 10% additional federal tax and possibly additional state taxes or penalties as well. Limited exceptions are available.

Important Note:  Equitable believes that education is a key step toward addressing your financial goals, and we’ve designed this material to serve simply as an informational and educational resource. Accordingly, this article does not offer or constitute investment advice and makes no direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Your needs, goals and circumstances are unique, and they require the individualized attention of your financial professional. But for now, take some time just to learn more.

This article is provided for your informational purposes only. Please be advised this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent advisor.

Equitable Financial Life Insurance Company (New York, NY) issues life insurance and annuity products. Securities offered through Equitable Advisors, LLC, member FINRA, SIPC. Equitable Financial Life Insurance Company and Equitable Advisors are affiliated and do not provide tax or legal advice.