Enrolling in a retirement plan or opening an IRA comes with an important question: do you want the tax break now, or later?
Tax me later: Pre-Tax
Pre-tax contributions reduce your taxable income today, which means more take-home pay now while your investments grow tax-deferred. You could also fit a higher contribution into your budget due to the tax savings. Maximum benefit is felt during higher earning years.
That benefit comes with a tradeoff. Every dollar you withdraw from retirement is taxed as ordinary income including the earnings. Will you be in a lower tax bracket in retirement? Once required minimum distributions (RMDs) begin in your 70s, retirees can be forced to withdraw more income than they actually need — potentially pushing them into higher tax brackets. At 65, Medicare premiums are based on income and so more distributions can equal higher premiums for part B and D.
Tax me now: Roth
With Roth contributions, you give up the tax break today and pay taxes upfront. In return, your investments grow tax-free and are not subject to required distributions. The downside is that Roth contributions further reduce your take-home pay today because you’re paying taxes upfront.
Have many years of compounding earnings ahead? This would favor Roth. Starting out in the workforce and in your lower earning years, also favors Roth.
Which One is better?
The answer depends on where you are financially today and expectations for the future. A physician in peak earning years may value the immediate deduction from pre-tax contributions, while a medical resident early in their career may benefit more from locking in today’s lower tax rates with Roth contributions.
Someone in the Federal 32%–37% brackets might lean toward pre-tax contributions to reduce current tax liability. On the other hand, someone in the 10%–24% range may prefer Roth, locking in a lower tax rate now and avoiding taxes later.
A Rule of Thumb
- Lower income years: Roth tends to make more sense
- Middle Range: Both Roth and/or Pre-Tax
- Peak earning years: Pre-tax often becomes more valuable
Having both types allows for flexibility and the ability to generate a sufficient income in retirement while keeping taxes manageable. The goal isn’t always choosing one over the other — it’s building flexibility. Having both pre-tax and Roth assets can give you more control over taxes, income, and retirement planning down the road.