What is the difference between traditional (pre-tax) and Roth (post-tax) contributions?
Traditional or pre-tax 401(k) contributions go into your retirement account before taxes are paid. This reduces your taxable income, and may put you in a lower tax bracket, giving you an immediate tax benefit. The funds grow over time, and taxes are paid when funds are withdrawn from the account (usually when you reach retirement age).
Roth or post-tax 401(k) contributions go into your retirement account after taxes are paid. The funds grow over time, but no taxes are paid when funds are withdrawn from the account, giving you a tax benefit upon retirement.
Many people choose to use Roth accounts during periods when they are in low tax brackets, or earning smaller incomes. This allows them to pay taxes when the tax bracket is low and avoid paying them in retirement, when the tax bracket may be higher. Those who are in higher tax brackets and anticipate being in a lower tax bracket after they retire may choose to use a traditional account, and receive the benefits now.
Withdrawals made before retirement age (59 1/2) from accounts less than 5 years old may be taxable. Talk to a tax professional to discover which account type is right for your circumstances.