Skip to main content

Main difference between pre-tax and Roth contributions [Bonus SECURE 2.0 Act update inside]

difference between pre tax and roth

As more employers offer a Roth 401(k), it’s important that you know the main difference between pre-tax and Roth contributions. In this post, we’ll explain what each contribution is and how to decide the best option. We’ve even included the most recent SECURE 2.0 Act update, so you can stay up-to-date on Roth deferrals.

What is the difference between pre-tax and Roth contributions?

It can be tricky to choose between a pre-tax contribution vs. Roth 401(k).

Roth and pre-tax contributions are two different ways to save for retirement in an employer-sponsored retirement account (401(k), 403(b), etc.). Each has its own tax implications and considerations.

Pre-tax contributions 

Pre-tax contributions allow individuals to contribute to retirement savings before taxes are taken out of their paycheck. Since taxes are deferred up front, the contributions and earnings in the account are taxed as ordinary income when the individual withdraws them during retirement.

Roth contributions

On the other hand, Roth contributions are made with after-tax dollars. This means taxes are paid on the contributions before deposited into the account. The money grows tax-free, and qualified withdrawals during retirement are also tax-free.

Employer 401(k) vs. Roth IRA

When an employee is allowed to make Roth contributions to their employer-sponsored retirement plan, it does not establish a separate Roth individual retirement account. An IRA is an account that is opened and managed independently by an individual, whereas plans like 401(k) or 403(b) are always employer-sponsored. A 401(k) or 403(b) allow Roth contributions in addition to or in lieu of pre-tax contributions, as mentioned above.

Key differences between a Roth IRA and a Roth 401(k)

Both a Roth IRA and a Roth 401(k)/403(b) are retirement savings accounts that allow your money to grow tax-free, but there are some key differences between the two:

  • A Roth IRA is a retirement account that you open and manage on your own, separate from your employer.
  • A Roth IRA does not allow contributions to be automatically deducted from your paycheck; 401(k)/403(b) plans allow contributions to be automatically deducted from your paycheck.
  • Roth IRA contributions have income limits, whereas there is no income limit on Roth 401(k)/403(b) contributions.
  • While the maximum contribution limit for a Roth IRA is $6,500 (or $7,500 if you're 50 or older), the maximum contribution limit for a Roth 401(k) is higher (currently $22,500 if you're under age 50 and $30,000 if you're 50 or older).*

There are many ways to save for retirement. It’s important to do your research and make the choice that is best for you.

Secure 2.0 Act update

A key component of the SECURE 2.0 Act has renewed conversation on Roth deferrals in retirement programs. Originally slated to begin in 2024, catch-up contributions for employees who have exceeded the salary threshold in the prior year will be required to be made as Roth contributions. After the industry raised significant concerns about its ability to effectively implement and administer the provision, the DOL approved a “transition period” until Jan. 1, 2026.

This applies to all participants who made over a certain dollar amount (to be determined) in the prior year for taxable years starting after Dec. 31, 2025. That limit will be indexed, so it will be updated annually. Plans that don’t currently allow for Roth contributions will need to be amended to allow for Roth deferrals if they wish to continue offering catch-up contributions. Your consultant and/or recordkeeping partners can help you work through these significant changes and their potential downstream effects.

Have questions about Roth retirement options or the SECURE 2.0 Act? Reach out to HANYS Benefit Services for guidance and to learn how we can enhance your organization's retirement offering. Also, be sure to check out our two-part SECURE 2.0 Discussion Series, containing SECURE 2.0 Act Session 1 and SECURE 2.0 Act Session 2.

 *Limits for 2023


HANYS Benefit Services is a marketing name of Healthcare Community Securities Corp., member FINRA/SIPC, and an SEC Registered Investment Advisor. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. The information in this piece is not a recommendation to invest nor should it be relied upon as instruction to invest.

Popular posts from this blog

What is HR vendor management? Overview with scenarios

Vendor management can be a litigious environment where efficiency, transparency and risk mitigation are paramount. With the right advisor in your organization’s corner, you’ll feel more confident navigating vendors and managing their services, ensuring streamlined processes and strategic alignment.   In this blog post, we'll cover the basics: What vendor management in HR entails, why it's important, how it can transform businesses and some scenarios in a few business types. Level up your knowledge and find the right partners to thrive.  Understanding vendor management in HR  Vendor management in HR involves the systematic management of third-party suppliers who provide goods and services essential to HR operations. This includes managing contracts, ensuring compliance with service level agreements and optimizing vendor performance to align with a company's long-term business goals.  A robust vendor management strategy can provide organizations with a structured ...
Read more

Section 125 – Cafeteria Plans Overview

A Section 125 plan, or cafeteria plan , allows employees to pay for certain benefits on a pre-tax basis. Employers use these plans to provide their employees with a choice between cash and certain qualified benefits without adverse tax consequences. Paying for benefits on a pre-tax basis reduces the employee’s taxable income and, therefore, reduces both the employee’s and the employer’s tax liability. To receive these tax advantages, a cafeteria plan must comply with the rules of Section 125 of the Internal Revenue Code and related IRS regulations. Under these rules, a Section 125 plan must have a written plan document and can only offer certain qualified benefits on a tax-favored basis. Once an employee makes a Section 125 plan election, they may not change that election until the next plan year, unless the employee experiences a permitted election change event. Also, for highly compensated employees to receive the tax advantages associated with a Section 125 plan, the plan must pass ...
Read more

FMLA Outsourcing: 6 Key Employer Insights

Organizations need help navigating employee leave of absence. With so many complex regulations, many employers consider outsourcing their employee leave programs to specialized third-party vendors. Compliance with the Family and Medical Leave Act, a federal law allowing eligible employees to take unpaid leave for personal reasons, is central to administering employee leave.  In this blog, we'll go more than six insights employers need about FMLA outsourcing. Use this as your go-to list as you weigh the potential benefits against the drawbacks.  1. Third-party prowess  Expertise is at the heart of the outsourcing question. Can your in-house human resource team competently manage the complexities of FMLA requirements? Or are there benefits to be gained from a third-party vendor’s specialized focus?  In-house HR staff might need help with FMLA regulations , causing compliance errors and/or knowledge gaps. In this case, it would make sense for employers to search fo...
Read more