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Pre-tax vs. after-tax: Which benefits your wallet most?

Most accounts take after-tax contributions, but some also take pre-tax money. Both have a place in your portfolio. Learn more about the differences and how to prioritize advantages below.



May 30, 2024

7 min. read

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Key Takeaways:
  • The terms “pre-tax” and “after-tax” indicate when you pay taxes on retirement or investment account contributions. 
  • Pre-tax contributions are made before you pay taxes, which are deferred to withdrawal. This increases your initial contribution and potential for growth, but you’ll owe taxes on the full distribution.
  • After-tax contributions are made with money you already paid income taxes on, so you invest less upfront, but it grows tax-free.

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      Words and phrases aren’t always as simple as they sound in the financial world, but there are no tricks to pre-tax vs. after-tax contributions — the names are pretty self-explanatory. 

      Pre-tax contributions are made before you pay taxes and are deductible from your taxable income. On the other hand, after-tax contributions are nondeductible and grow tax-free.

      You’ll owe taxes on deferred contributions when you cash out, but tax-free earnings don’t trigger any additional taxes at distribution. 

      But there’s more than a definition here. We’re experts at reducing your tax liabilities to grow more wealth, and we want to teach you how pre-tax and after-tax contributions impact your retirement strategy and tax efficiency.

      Image compares how pre-tax and after-tax contributions work plus each's key benefit.

      Pre-tax meaning: Tax-deductible contributions

      Pre-tax income refers to earnings you haven’t paid taxes on. Instead of your employer withholding taxes from your entire paycheck, pre-tax contributions are routed to your tax-advantaged retirement accounts first. 

      You will still owe taxes on the money earned, but not until you withdraw from the account, at which point your withdrawal — usually a combination of earnings and contributions — is added to your taxable income for the year. 


      If you earn $50,000 a year in retirement and withdraw $25,000 from your tax-deferred account, you’ll owe taxes on all $75,000 of annual income.

      This withdrawal increases your total taxable income and can push you into the next highest tax bracket.

      So, what’s all the hubbub about pre-tax accounts if they increase your retirement taxes?

      The big perk of tax-deferred over after-tax accounts is that pre-tax contributions reduce your current taxable income. Most people are earning far more now than they will in retirement, so a tax deduction can reduce your tax bill when it matters most

      But all tax deductions aren’t created equal. Your 401(k) contributions are usually tax-deductible, but Traditional IRA contributions might not be deductible if you or a spouse also contribute to a 401(k). 

      It’s important to understand how each of your pre-tax contributions might affect your annual tax bill. 

      Pros Cons
      Tax deductions for your current tax year Taxes owed on withdrawals of contributions and earnings
      Delay taxes and withdrawal at a lower tax rate May be harder to access in a pinch
      Increase initial investment for compound growth

       Pre-tax accounts

      Pre-tax contributions actually fund tax-deferred accounts. These are your traditional retirement accounts, as well as other personal accounts, including:

      • 401(k), 403(b), and other employer-sponsored accounts
      • Traditional IRAs
      • Pensions
      • Tax-deferred annuities (TDAs)
      • Health savings accounts (HSAs)
      • Life insurance
      • Health insurance

      Each account type has specific rules on contributions, deductions, and accessing account funds. 

      For example, you can contribute up to $23,000 to a 401(k) in 2024, while a traditional IRA tops out at $7,000. 

      But a traditional IRA is independently owned, so you get to hand-select your plan provider and investment options. 

      Image breaks down how pre-tax contributions affect your deduction + taxes.

      After-tax meaning: Tax-free growth

      You contribute after-tax funds into most regular investment accounts and Roth retirement accounts. These funds are taxed the same as your usual income, and since you pay taxes upfront, you don’t owe anything on contributions (or earnings after a certain age) that you withdraw from the accounts. 

      With after-tax retirement plans, you won’t owe any additional taxes on returns or contributions as the funds continue to grow. 

      This is an exceptional asset for wealth building since your taxes on the contributions are negligible compared to the significant returns earned with long-term investments. 

      In retirement planning, after-tax accounts are nice for early career professionals with relatively low income but significant earning potential. But even high-income earners can benefit from a diverse portfolio of tax-free and tax-deferred accounts.

      Pros Cons
      Roth retirement contributions grow tax-free Taxable investments like mutual funds still charge taxes on earnings
      No taxes owed on contributions at withdrawal — great for lower-earning investors No upfront tax deduction
      No required minimum distributions, or RMDs Lower initial contribution after taxes paid

      After-tax accounts

      After-tax accounts include those you fund with earnings that you paid regular income taxes on. Usually, “after-tax” refers to tax-advantaged retirement accounts, where neither earnings nor taxed contributions are subject to income tax at withdrawal, provided you’re at least 59.5 and have owned the account for five years or more. This includes:

      • Roth 401(k)s, Roth 403(b)s, and other Roth employer-provided plans
      • Roth IRAs

      But several types of accounts accept after-tax funds, including:

      • Savings accounts
      • Certificates of Deposit
      • Taxable brokerage accounts
      • Life insurance
      Image breaks down how after-tax contributions grow tax-free.

      Choosing between pre-tax and after-tax

      Both types of accounts can help grow wealth while minimizing taxes, but the impact varies depending on your financial situation and goals. 

      Pre-tax contributions reduce your taxable income today, which is great if you’re a high earner. They’re also great for:

      • Tax strategies: Delay withdrawals and tax events until you have a lower salary and lower tax bracket.
      • Larger investments: Contributing pre-tax means you have more money to contribute upfront and benefit from compound growth. 

      After-tax accounts require you to pay taxes on contributions upfront. These are your typical savings accounts, as well as some retirement accounts like Roth IRAs. This is a good choice for:

      • Tax-free potential: Tax-exempt retirement accounts grow tax-free, leading to larger earnings with no taxes owed on the growth.
      • Room to grow: If you’re early in your career and looking to boost your income, start with after-tax investments now while your income tax rate is relatively low.

      Before we dive into key questions to help with your decision, here’s a quick overview of common pre-tax vs. after-tax accounts: 

      Pre-tax accounts After-tax accounts
      401(k) Roth 401(k)
      IRA Roth IRA
      Tax-deferred annuities (TDA) Savings accounts
      Health savings accounts (HSA) Certificates of deposit
      Mutual funds

      Expect your income to increase? Choose after-tax accounts

      If you’re still building your career and plan to increase your income over the next few decades, start with after-tax retirement accounts. You’ll pay taxes on your income as usual this year, but you won’t owe anything in retirement when you cash out your after-tax contributions and tax-free earnings

      Instead, all of those earnings are yours in full — ideally reducing your total lifetime tax liability and cutting the taxes owed in retirement when money can be tight. 

      Want a smaller tax bill today? Try pre-tax accounts

      Pre-tax accounts like 401(k)s reduce your current taxable income, lowering your annual tax bill. 

      Understand that not all pre-tax contributions are tax deductible. For example, traditional IRA contributions might not qualify for a deduction if you or a spouse contribute to an employer-sponsored retirement plan and exceed a certain income level. 

      Additionally, you will owe taxes on the contributions and all investment earnings as you withdraw funds from the account. But most people have a lower income and tax rate in retirement and, therefore, a lower tax bill. 

      Avoiding required distributions? Go after-tax

      Many tax-advantaged accounts have required minimum distributions (RMDs) beginning at age 73 or kicking in when you retire/quit working. If you have a large nest egg, these distributions can run a hefty tax bill and eat into your retirement and estate.

      However, the federal government eliminated RMDs for Roth accounts for as long as the participant is alive. So, RMDs become your beneficiary’s problem. 

      Other after-tax assets like bank savings accounts and taxable brokerage accounts aren’t subject to RMDs, period. 

      Saving for a short-term goal? Try common after-tax investments

      If you need to stow away cash for a rainy day or a shorter-term goal like a house down payment, you need easy access to the funds. Your regular old savings and investment accounts are probably your best bet. 

      Depending on how long you’re saving and how quickly you need to liquidate the funds, everything from a high-yield savings account to a taxable mutual fund will work here. 

      You’re still earning some returns on your investments, but the goal is to offset inflation rather than significantly grow your wealth. So choose a steady investment like high-yield savings. Equities like mutual funds can still get the job done, but they’re riskier. 

      Some tax-advantaged accounts are surprisingly liquid, like Roth IRAs that permit withdrawals of contributions at any time with no penalty. But it’s always best to leave your retirement funds invested so they fully benefit from long-term, compound gains. 

      Looking for access flexibility? Consider a 401(k) or Roth IRA

      Some accounts are easy to tap into, like bank savings accounts. These also generally offer far lower returns than, say, your 401(k) investments. 

      If you’re able to take on a bit more risk but still want access to your money if you need it, consider a traditional 401(k) or Roth IRA

      Pro tip:

      Some retirement accounts are flexible, and cashing out early can help you avoid high-interest debt or hardships. However, a reduced balance today can upset your retirement plan.

      Tap into these resources before your retirement account if you’re in need of cash:

    • Budget adjustments
    • Local assistance (housing, food, debt counseling)
    • Emergency savings
    • Personal loans
    • Taxable brokerage accounts
    • A traditional 401(k) has the typical rules on withdrawals — no access until you’re 59½ years old, or else you owe a 10% early withdrawal penalty (which is significant). But there are also early withdrawal exceptions for events like buying a house or covering medical bills. 

      Also, 401(k) loans are the big win for flexibility. Some providers allow you to borrow from your account, pay it back with interest, and the full repayment and interest go back into your 401(k) to prevent derailing your retirement plan. 

      If your 401(k) plan doesn’t permit loans, consider a Roth IRA. Roth IRAs accept after-tax contributions that you can tap into anytime because they’re taxed upfront. 

      Key distinction: Penalty-free early withdrawals only apply to the contributions. Leave any investment earnings, or else you will owe a 10% early withdrawal penalty. 

      The Playbook take: Make a personalized, tax-advantaged plan for super savings

      Good luck finding a bill in your wallet that the government doesn’t know about. All monetary contributions are either pre- or after-tax, and most accounts accept after-tax contributions. However, there are some tax-advantaged accounts you fund with pre-tax cash, which earns you a deduction and ultimately a lower tax bill. 

      Pre-tax accounts defer your taxes and are ideal for retirement, but you should be aware of the rules around early withdrawals. The most common type of after-tax account is a Roth IRA. 

      Want to clear up which accounts are which, and how they all play into your tax strategy? See how Playbook can help you identify your high-priority investments while reducing your debt and tax bill.

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      About the author

      Phil Wettersten, Series 7 & 66

      Head of Product Success

      Phil holds both Series 66 and Series 7 credentials and previously served as an Investment Consultant at TD Ameritrade. At Playbook, he's the authoritative voice representing our customers, spearheading product enhancements and strategic planning. Phil's unwavering dedication keeps us ahead in delivering top-notch user experiences.

      Tanza Loudenback, CFP®


      Tanza is a CFP® certificant, writer, and editor. From 2015 to 2021, she was a top-read author and editor at Insider. Her work focuses on helping people make smart decisions with their money and is published by a variety of online publications.

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