Roth accounts, including Roth IRAs and Roth portions of employer-sponsored plans like 401(k)s, allow you to contribute after-tax money that grows entirely tax-free. Qualified withdrawals are also entirely tax-free. Pre-tax accounts, on the other hand, allow you to put in untaxed money that grows tax-deferred, but is taxed upon withdrawal.
Roth accounts provide a great future tax benefit, while pre-tax accounts give you that benefit now. So is it better to use the tax advantage now by contributing to a pre-tax account or defer that benefit until the future? It depends on your combined marginal income tax rate. We think if this rate is above 30%, there is a good chance it will be lower in the future, and you will be better served saving money on taxes now.
If your combined rate is below 25%, there is a good chance it could be higher in the future, so contributing to Roth accounts now and avoiding future taxes likely makes sense. If you are in the middle (25% to 30%), base your decision on whether or not you expect your tax rate to be higher or lower in the future.
Regardless of which makes sense for your situation, everyone that has the ability to do so should consider contributing to a Roth IRA, no matter your tax rate. Check out the video below if you have more questions about which type of account is right for you.
