Pre-Tax vs. Roth 401(k): Same Growth, Different Path
If you’ve ever wondered whether a pre-tax or Roth 401(k) is better for your retirement, you’re not alone. It’s one of the most common questions I hear from new clients. The short answer? If your tax rate is the same when you contribute and when you withdraw, it doesn’t actually matter. You’ll end up with the same amount of after-tax money.
Let’s break it down.
The Math Behind the Match
Here’s a simple example. Let’s say you earn $100,000 and want to save $10,000 toward retirement. You have two options:
Option 1: Pre-Tax Contribution
- You contribute $10,000 pre-tax.
- That full amount grows over time.
- At retirement, you pay taxes on withdrawals.
Option 2: Roth Contribution
- You pay taxes now (let’s assume 25%), leaving you with $7,500 to contribute after tax.
- That $7,500 grows tax-free.
- At retirement, withdrawals are tax-free.
Let’s assume your investments double over time (100% return). Here’s what your account looks like at retirement:
| Contribution Type | Initial Investment | Value at Retirement | Taxes at Withdrawal | After-Tax Value |
| Pre-Tax | $10,000 | $20,000 | $5,000 (25% of $20,000) | $15,000 |
| Roth | $7,500 | $15,000 | $0 | $15,000 |
*Hypothetical, for illustrative purposes only.
Same investment growth. Same tax rate. Same after-tax result.
So, What Does Matter?
- Tax Bracket Now vs. Later: If you expect to be in a higher tax bracket later, Roth might make sense. Lower bracket later? Pre-tax could be better.
- Flexibility in Retirement: Roth assets can help manage your taxable income later, giving you more control over how much you pay Uncle Sam in retirement.
- Diversification: Having both pre-tax and Roth gives you options to draw from different “buckets” based on the tax landscape down the road.
One Size Doesn’t Fit All
While the math may be equal in a vacuum, your real-life scenario is anything but generic. That’s where personalized financial planning comes in.
Apollon Financial LLC (“Apollon”) is an investment advisor registered with the SEC. This content is for informational purposes only and does not constitute investment, financial, tax or legal advice. It is not a recommendation or solicitation to buy or sell any security. Investing involves risk, and clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. Please consult a licensed professional before making investment, tax, or legal decisions
