We get this question from our clients a lot:

“How much Roth should I contribute to in my 401(k) versus my pre-tax contribution?”

It’s a great question and you probably will NOT be surprised by our answer: 

“It depends.”

You are currently able to contribute $23,000 (+$7,500 if you are 50+) in employee salary deferral for 2024, per the IRS Guidelines. This number is an aggregate number that combines both your pre-tax and Roth contributions. We are always encouraging our clients to look for ways to contribute to Roth (the Tax-Free bucket) so why wouldn’t we just advise putting 100% of your 401(k) contributions into Roth!?

The main reason is that your pre-tax contributions to your 401(k) lower your current year salary dollar-for-dollar off of your highest bracket paid. You will still have to pay these taxes when you pull the funds out of the account in retirement, but we can effectively “kick the can down the road” as far as the IRS is concerned. For someone that is in the higher tax brackets (35%+), it might be worth focusing on delaying that tax bill knowing that we will very likely be 1-2 lower tax brackets in retirement. Even if taxes go up, this strategy is likely worth it.

Even in the case above, we still might encourage those clients to at least put a small portion of the contribution into Roth. It really does become a balancing act of focusing on your CURRENT tax bill versus planning for your FUTURE tax bills. There is NO “one-size-fits-all” when it comes to recommendations for this, and you should carefully consider what is most important to you.

Next up: What is a Conversion and how is it done correctly?

Disclosures

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.