| Choosing between pre-tax and Roth 401(k) plans can be much trickier than you think | | |  | WED, JUN 01, 2022 | | | | Do you know the difference between a pre-tax 401(k) deposit and a Roth 401(k) contribution?
If you are currently employed or changing jobs, you may need to make a choice between the two. And making the smart call can be tricky, according to financial experts.
CNBC's Kate Dore reports on the differences.
Pre-tax 401(k) deposits reduce your adjusted gross income, and the money grows tax-deferred, meaning you'll pay taxes on any withdrawals. On the flip side, Roth 401(k) contributions don't provide an upfront tax write-off, but earnings are tax-free.
However, there may be other tax trade-offs, so you'll need to weigh the pros and cons before diverting funds.
If you anticipate you will have more income or higher taxes in retirement, tax-free withdrawals from Roth contributions may make sense. Meanwhile, tax-deferred contributions may be better if you expect lower earnings and taxes, financial experts say.
Still, some experts say you may also consider creating a mix of pre-tax and after-tax funds from a diversification standpoint.
While this may seem a bit overwhelming, take your time and do your research. It's also a good idea to seek assistance from a financial professional.
As always, before you make any big decision, sit down and take an honest look at your entire financial situation. Evaluate your comfort zone, figure out your life goals and risk tolerance, and this will help you make the right decision that aligns with your specific needs.
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