Pre-tax or Roth 401k?

So you’ve decided to enroll in your company’s 401k plan or have decided start your own IRA (Individual Retirement Account) with a bank. So what’s next? Your next move may seem daunting. I’m here to break them down for you.

Your first step is to decide on how much money you want to send to the account at regular intervals. For example, if your employer pays you semi-monthly (2x a month, 24x a year) you can contribute (your decided amount) every pay period. If you have your 401k in a bank, you can choose how frequently you want payments to be made.

Now, stay with me, you often can choose between flat dollar amounts ($20, $50, etc.,) or a percentage (1%, 5%, 10%, etc.,). This is dependent on your current budget and retirement goals (see here for understanding how to get this amount). Keep in mind, the IRS limits an individual’s total annual contribution to $23,500 in 2025 (or if you are over the age of 50 you can add an additional $7,500 as catch up).

If you have 24 pay periods in a year (semi-monthly payroll), this amount would be $979 (and 16 cents if you care). For those with 26 pay periods in a year (bi-weekly payroll) this amount would be $903 (and 84 cents).

Log on to your account, your employer sponsored plan (meaning, the account is monitored, accessible, and funded through your employer and paycheck) will have sent you a letter regarding the opening of your account, website, and contact information if you need any help.

I would highly recommend calling a rep to walk you through logging on and navigating the site. Some questions I recommend asking are: where is my personal information located, where can I find my contribution, fund options, and payment information.

Once you have decided on an amount, you need to navigate to the page to add that amount to your account. Typically, they will ask how you want the money to be sent to the account: Pre-tax or Roth.

Simply defined, Pre-Tax essentially means the money goes in as you decided at this moment, grows at a rate, and then when you retire (at 60 years old, 65, 72) you will be taxed on the distribution (amount withdrawn or taken out whether it’s the whole amount or partial amounts) at a rate aligned with your tax bracket at the time of your retirement.

What is a tax bracket??

The IRS sets tax brackets based on your income. The higher you make, the higher you get taxed. If you have ever wondered why your raise surprisingly didn’t result in a larger take home pay, this is why.

Now, I can’t tell you which type of contribution to make. But I can ask you questions for your individual, unique, personal financial situation. Use the connect button at the top of my site to reach out!