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Roth 401(k) Knowledgebase

Roth Contribution Impacts Net Paycheck

The Roth option is financially beneficial to participants whose marginal tax rate (MTR) is lower when contributions are made versus their MTR when distributions occur following retirement, since taxes were paid at the lower rate when contributed.  Conversely, the pre-tax option is more beneficial to participants whose MTR is higher when contributing versus when distributions commence following retirement, since taxes are paid at a lower rate when receiving distributions at retirement.  However, to formally analyze which option is preferable, plan participants must also understand how pre-tax versus after-tax Roth salary deferral impacts net pay.

Same Net Pay means Lower Roth Contribution  If a participant chooses to contribute to the Roth option instead of the pre-tax option, and he wants the same net take home pay as the pre-tax option, the Roth contribution is lower than the pre-tax contribution because he pays tax on his salary reduction before it is deposited to the Roth account.

Example: Same Net Pay means Lower Roth Contribution

Same Roth Contribution means Higher Salary Reduction  If a participant wishes to have the same dollar amount deposited to the plan when compared to a pre-tax contribution, then his salary reduction is higher and net take home pay is lower when compared to the pre-tax option.

Example: Same Roth Contribution means Higher Salary Reduction

Case Study: Maximize Retirement Benefits: Pre-tax Limit Equates to $33,846

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