When you have a Gusto 401(k), you can make both pre-tax (also known as traditional) and Roth contributions. The key difference is when you pay taxes—now or later—and understanding this can help you make the most of your retirement savings.
Pre-tax contributions let you save for retirement with money you haven't paid taxes on yet. This reduces your taxable income for the year, giving you a tax break today. You'll pay taxes on both your contributions and earnings when you withdraw the money in retirement.
Roth contributions are made with after-tax dollars. You pay taxes on this money upfront, but you'll never pay taxes on it again. If you make a qualified withdrawal, both your contributions and earnings are completely tax-free.
A qualified withdrawal generally means you're at least 59½ years old and have held the Roth account for at least five years.
Pre-tax
Roth
Contributions
Made with pre-tax dollars; reduces your current taxable income
Made after tax; your current taxable income is not affected
Distributions
Subject to federal and state income taxes when you withdraw
Earnings are not taxed for qualified distributions
Employer match
Yes
Yes, but employer match contributions are always made pre-tax
Required minimum distribution (RMD)
Yes, when you reach age 73 (75 if you reach age 73 after Dec 31, 2032)
As of 2024, Roth assets are not included when calculating your RMD amount
When deciding between pre-tax and Roth contributions, consider your income, tax bracket, and long-term financial goals.
Pre-tax contributions reduce your taxable income today. If you’re in a high tax bracket now and expect to be in a lower bracket during retirement, pre-tax contributions can save you money.
Roth contributions don't affect your current taxable income, but qualified withdrawals won’t be taxed later. If you expect to be in a higher tax bracket during retirement, Roth contributions may save you money in the long run.
The longer your money grows, the more earnings it generates. Pre-tax contributions are always taxed when withdrawn, including earnings. Roth contributions grow tax-free, and qualified withdrawals—including earnings—are never taxed.
Because earnings compound over time, the number of years until you retire matters when choosing between pre-tax and Roth.
If you plan to leave retirement savings to your beneficiaries, Roth contributions can be advantageous. Distributions to beneficiaries from Roth 401(k) accounts are typically tax-free.
You can contribute a mix of both pre-tax and Roth to your Gusto 401(k). This lets you balance tax savings today with tax-free growth for the future.
Note: The Internal Revenue Service (IRS) sets an annual contribution limit that applies across all your pre-tax and Roth contributions combined. See current IRS limits.
If you're unsure how to split your contributions, consider speaking with a tax advisor who can review your specific situation.
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal, and financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial advisor or tax professional before relying on the information provided herein.