What’s Better: Roth or Pre-Tax?

In this episode of Financial Clarity for Doctors, Corey and Rachelle discuss the benefits of pre-tax and Roth retirement accounts.  We love savings, but it’s important to understand when and how you pay taxes.  You will have to pay taxes on your retirement savings, it’s just a matter of when.

Pre-Tax Retirement Savings:

• Tax deduction now.
• Can grow without paying taxes along the way.
• Pay ordinary income taxes on withdrawals.
• Can contribute through work retirement plans up to a maximum.
• Generally, not accessible before age 59.5 without penalty taxes.
• Best in your peak income earning years if you are in a high tax bracket.

 

Roth Retirement Savings:

• No tax deduction now.
• Can grow without paying taxes along the way.
• Withdrawals in retirement are tax free.
• Can contribute through Roth IRA (potentially “backdoor” Roth) and many employers offer a Roth deferral option. These plans have a maximum as well.
• The growth in the account is generally not accessible until Age 59.5 without penalty taxes.
• Pay taxes now at a known rate, instead of later at an unknown rate.
• Best when you are in a lower tax bracket than you expect to be in the future or in retirement.

One last note – keep in mind that taxes change over time.  We can make decisions now based on current tax rates, but we don’t know what tax rates will be later in our careers or in retirement.  Ideally, we have retirement savings that is diversified across tax treatments, so that we can adapt to changing tax environments in retirement.

For more financial planning tips from Corey and Rachelle, find them on social media!
LinkedIn: @CoreyJanoff and @RachelleVanderzanden; Instagram: @CoreyJanoff and @VanderzandenRachelle; and Twitter: @CoreyJanoffCFP and @RachelleFinance 

 

Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Finity Group, LLC and Cambridge are not affiliated. Cambridge does not offer tax or legal advice.