When you save for retirement with MO Deferred Comp, you have two main ways to contribute: pretax and Roth. There is a lot of confusion about pretax and Roth contributions, so in this DC Update, I’m going to do my best to quickly explain the differences. Pretax contributions go into your account before you pay any taxes. That means you pay less in taxes today, and your money grows tax-deferred. Tax-deferred is just a fancy way of saying that you don’t pay taxes on the money you contribute or on the earnings it generates until a later time, usually when you withdraw it from your account. A downfall of saving with pretax is that you’ll pay taxes on both your contributions and earnings when you withdraw the money in retirement. Roth contributions, on the other hand, go into your account after you pay taxes. So, while you don’t get a tax break today, your money grows tax-free — and qualified withdrawals in retirement are also tax-free. In addition, Roth savings are not subject to required minimum distributions when you turn 73. A downfall of Roth contributions is that since you pay taxes on your contributions upfront, it reduces your take-home pay today. So, the key difference is that with pretax contributions you pay taxes later; with Roth contributions you pay taxes now, not later. Choosing which option is right for you depends on several things like your current age, income level, current tax rate, expected tax rate in retirement, and your savings goals. It’s important to mention that you have the option to split your contribution and save with both pretax and Roth. In fact, many people choose that route and take advantage of both tax benefits. The good news is that no matter which contribution option you choose, your money is working for your future. To learn more, visit www.modeferredcomp.org.
