Understand when income taxes apply
Traditional pre-tax salary deferrals generally reduce current federal taxable income, with distributions generally included in taxable income. This does not mean that all taxes are avoided, and other tax considerations can apply.
Learn more
Designated Roth salary deferrals are included in current income. Qualified distributions from the designated Roth account, including earnings, are excluded from gross income under the applicable rules. Nonqualified distributions can be treated differently.
Consider circumstances rather than assuming a universal answer
Relevant considerations may include current taxable income, expected future income, access to cash and the role of other accounts. Future tax laws and personal circumstances are uncertain, so avoid assuming that either approach is always preferable.
Learn more
A plan may allow contributions to be directed between designated Roth and pre-tax accounts, subject to its terms and applicable rules. Review the available choices with the plan administrator and discuss the tax implications with a qualified tax professional.
Distinguish contributions, conversions and distributions
Choosing how future salary deferrals are treated is different from moving an existing pre-tax balance into a Roth account. An eligible conversion or in-plan rollover can create current taxable income and requires a separate review.
Learn more
Roth distributions must meet applicable holding-period and qualifying-event conditions to receive qualified treatment. Contribution limits, eligibility details and distribution rules can change. Refer to the linked IRS guidance rather than treating this overview as a statement of your personal tax requirements.
- Confirm which contribution types your employer plan offers.
- Review the separate records for pre-tax and designated Roth amounts.
- Ask about tax consequences before a conversion, rollover or distribution.
Frequently asked questions
Are Roth salary deferrals excluded from current income?
No. Designated Roth salary deferrals are included in current income. They are treated differently from traditional pre-tax salary deferrals.
Are all Roth distributions treated the same way?
No. Qualified distribution treatment depends on applicable conditions. Nonqualified distributions can have different tax consequences, so review the IRS guidance and the account's details.
Can I use Roth and pre-tax contributions in the same plan?
A plan that offers designated Roth contributions may allow you to allocate salary deferrals between Roth and pre-tax accounts, subject to the plan's terms and applicable rules.
Is choosing Roth for future contributions the same as a conversion?
No. Directing future salary deferrals to a Roth account is different from moving an existing pre-tax balance into a Roth arrangement. A conversion or in-plan rollover can have current tax consequences.
Which approach is right for me?
There is no universal answer. Consider your current circumstances, possible future income, other accounts and the plan's choices. A qualified tax professional can help evaluate the tradeoffs without assuming future tax outcomes.