Pre-tax or Roth account: Which is the right one for me?

Tim Pope |

I remember the moment it dawned on me… I’m on final… I had already reduced the power but we were getting low. More power. More. Moore. That’s the guidance from my instructor. Wait, although I had taken power out, I can put it power back in and that doesn’t make me a bad student or a throttle jockey. It means I have situational awareness and I understand what my options are to keep the airplane flying until we touch down. Stability and Flexibility is key.

When it comes to tax and retirement planning, flexibility is key. Deciding which tax structure to use for your retirement savings, how much of it to use and if, and when you should transition from one to the other can all have tangible impacts on your tax liability today and how much of your investment you keep in retirement.

Let’s start with the basics:

What is a pre-tax retirement account?

A pre-tax account is a type of retirement savings account where you contribute money before taxes are taken out of your paycheck. This means that the money you contribute to a pre-tax account reduces your taxable income, which can lower your tax liability in the year you make the contribution.

Examples of pre-tax accounts include traditional 401(k) plans and traditional individual retirement accounts (IRAs). With these types of accounts, the money you contribute is not subject to taxes until you withdraw it in retirement. At that point, the withdrawals are taxed as ordinary income.

What is an after-tax retirement account?

A Roth account is a type of retirement savings account where you contribute money after taxes have been taken out of your paycheck. This means that the money you contribute to a Roth account does not reduce your taxable income in the year you make the contribution.

Examples of Roth accounts include Roth 401(k) plans and Roth individual retirement accounts (IRAs). With these types of accounts, the money you contribute has already been taxed, so withdrawals in retirement are tax-free if certain requirements are met.

How do I decide which account type to choose?

Before providing scenarios where a pre-tax account might be appropriate, it’s important to note that whether you should use a pre-tax account or a Roth account depends on several factors, including your current tax situation, your expected tax situation in retirement, and your personal preferences.

When does a pre-tax account make sense for me?

  • You expect your future tax bracket to be lower (long-term): This could be the case if you’re working through the homestretch as a pilot and nearing your mandatory retirement date or your planned retirement date. To estimate what your future tax bracket will be, you’ll need to account for all sources of retirement income and their tax structures. Next you run scenarios that project low, average, and high expense years to get an idea of your future tax bracket.


  • You’re experiencing a temporary increase of taxable income: For many pilots, your pay is relatively predictable. Sometimes pilots have other sources of taxable income. Some examples include spousal income, income from side businesses, sale of capital assets and large sign-on bonuses. During a year when you anticipate an increase in taxable income due to a one-time event it may make sense to use the pre-tax feature of your retirement accounts to help decrease the taxable income for the year.


  • You want a tax-efficient method of charitable giving: At age 70.5 you are eligible to make a qualified charitable distribution of up to 100k (indexed for inflation starting in 2024) directly from your IRA to a 501(c)(3) charitable organization. Giving directly to charity in this way is beneficial because the distribution is not counted towards your taxable income for the year. The tax-deduction you receive on the initial contribution, the market helps to compound your contribution, followed by the tax-free charitable distribution work together to create a tax-efficient method of giving.


  • When Should I consider contributing to a Roth account?
  • You expect your future tax bracket to be higher (long-term): If you’re a pilot who expects to spend the next several decades increasing your earnings AND your investment savings you might also reasonably expect that your future tax bracket will be higher than your current bracket. If this is the case a Roth account allows you to pay taxes now at your current rate and avoid paying taxes on any growth in your account at the higher expected rate.


  • You need the flexibility to make large lump sum withdrawals in Retirement: Maybe your retirement plans include buying a second home and making major renovations. Or perhaps you’re planning a series of trips or lifetime gifts to children and grandchildren. Whatever your scenario, a Roth account affords you the flexibility to make large lump sum withdrawals without impacting your taxable income or other income related premiums, such as Medicare. Conversely, the Roth account will not require distributions at a certain age during your lifetime like pre-tax accounts. This means you can leave the money in to grow for as long as you’d like without interruption.


You’re thinking about a tax-efficient estate planning technique: Perhaps your retirement income needs are met and you’re considering leaving a gift to the next generation. The tax-free nature of the Roth account makes it a tax efficient gift to leave behind. Since non-spouse beneficiaries of inherited qualified accounts are required to distribute the account over a 10-year period, a Roth account allows the beneficiary greater control over their taxable income than a pre-tax account would.

Just like my light-bulb moment on final, the same is true for you. Your personal finance conditions will change over time and this decision will need to be revisited.

  • Substantial change in income/filing status:
    • Spouse starts working
    • Spouse stops working
    • Change in tax filing status (e.g marriage, divorce, head of household)


  • Change in tax legislation/tax brackets
    • The current tax income tax provisions via the TJCA is set to sunset at the end of 2025
    • IF the current brackets are not extended, and the brackets revert to how they were previously, some pilots may see a tax increase.


  • Future plans change
    • When your plans change, it’s time rethink your current strategy and make any necessary adjustments to make sure you’re on course.