Open Enrollment Isn’t Just About Health Insurance: It’s Time to Rethink Your Retirement Tax Strategy
At Ecos Wealth Advisors, we often say that open enrollment season is about more than picking the right health plan. It’s also one of the best moments each year to revisit how you're contributing to your employer sponsored retirement accounts (401s), especially whether you’re using Traditional (pre-tax) or Roth (after-tax) deferrals.
For those in their 30s, 40s, and early 50s, this question isn’t just about how much you’re saving. It’s about how much of that money you’ll actually keep when you retire. And the difference between pre-tax and after-tax contributions can easily add up to tens or even hundreds of thousands of dollars over your lifetime.
So as open enrollment kicks off this fall, now’s the perfect time to look at your paycheck, your retirement plan options, and ask: am I using the right tax strategy for my future self?
Traditional vs. Roth: What’s the Real Difference?
At a high level, pre-tax contributions reduce your taxable income today. That money grows tax-deferred, but when you retire, your withdrawal is taxed as ordinary income.
After-tax contributions work in reverse. You pay taxes now, contribute after-tax dollars, and enjoy tax-free growth and withdrawals in retirement.
Choosing between them depends on three main things:
Your current income and tax bracket
Your expected future tax bracket
Your long-term retirement goals and longevity
The Case for Roth After-Tax Contributions, Especially When You’re Younger
If you're in the early stages of your career or your income is currently moderate, there's a strong case to be made for using after-tax contributions. Here’s why: You’re likely in one of the lowest tax brackets you’ll ever be in. That means the taxes you pay on contributions today are relatively low compared to what you might pay decades from now.
Let’s say you’re 32 years old, earning $80,000, and you’re in the 22% marginal tax bracket. You contribute $8,000 to a Roth 401(k) this year. Yes, you’ll pay slightly more in taxes now on those contributions, but the $8,000 will grow tax-free for 30+ years.
If instead you chose pre-tax, yes, you'd save a little in taxes today, but if you're in a higher bracket at retirement (say, 28% or 32%), you'll end up paying more in tax on a much larger amount later. The math quickly favors Roth after-tax in the early years.
This is especially powerful for those who have a few decades left of compounding. Roth contributions allow you to lock in your current tax rate, no matter what Congress does down the road with tax laws.
The Case for Traditional Pre-Tax Contributions, As Your Income Climbs
Now, if you’re in your peak earning years, say late 40s through late 50s, and you’re in the 32% or 35% federal bracket, the value of that pre-tax deduction is hard to ignore. Saving $1 today and avoiding 35 cents in taxes adds up quickly, especially if you're maxing out contributions.
And if your retirement plan includes dropping into a lower bracket (say 22% or 24%) in retirement, you’ll likely come out ahead using pre-tax now and paying lower taxes on the withdrawals later.
This is particularly relevant for clients who’ve accumulated significant retirement savings, are planning to retire before age 70, and can manage their tax brackets through careful withdrawal strategies. Pre-tax deferrals also give you more take-home pay to cover short-term needs, education costs.
The Smart Move? Consider a Blend
Here’s what we often recommend: use both.
Many plans allow you to split your contributions between Traditional and Roth. By doing so, you hedge against future tax uncertainty and create flexibility in retirement. Having both taxable and tax-free buckets gives you more control over your withdrawal strategy later, helping you minimize your tax bill in retirement and avoid things like Medicare premium surcharges or pushing yourself into a higher bracket unintentionally.
Here’s a tip
A Roth IRA is another powerful tool, in addition to your employer-sponsored plans (401s), especially when you’re young. The earlier you contribute, the more years your money grows tax-free. Even if you can’t max out a contribution to a Roth IRA each year, small, consistent contributions made in your 20s, 30s, and early 40s can balloon into six-figure assets over several decades. For high earners phased out of direct Roth IRA contributions, backdoor Roth IRAs remain a viable strategy with careful coordination (not sure, reach out to Ecos Wealth Advisors to see if you are eligible).
Open Enrollment: The Ideal Time to Rethink Your Strategy
Retirement success isn’t just about how much you save; it’s about how you save it. This fall, when reviewing your employer benefits, consider reaching out to Ecos Wealth Advisors to select the right balance between pretax and after-tax contributions in your retirement plan.
If you're not sure, or if your life, income, or tax situation has changed recently, this is the right time to talk to your financial advisor. We can help you model different scenarios, forecast your future tax bracket, and make sure your retirement savings strategy supports both your goals and your tax efficiency.