Two ways to save
You have two tax-advantaged ways to save in the DCP—Pre-tax and Roth (after-tax). Pre-tax contributions are made to your DCP account before taxes and are therefore deducted from your paycheck. Roth (after-tax) contributions are made to your DCP account after taxes are deducted from your paycheck. You can choose to save using one contribution type or both.
Pre-tax Advantages
Reduces taxable income in the year you make the contributions.
Has less impact on take-home pay because contributions are made before taxes.
Defers taxes until you separate from City service and make a withdrawal.
Roth (after-tax) Advantages
Reduces your taxable income in retirement (if the account is held for at least five years and you’re at least age 59½).
Has less impact on retirement income because no taxes are due on distributions.
Diversifies your tax risk if you also contribute pre-tax (see below).
Combination of Pre- and Roth (after-tax) Advantages
Reduces some taxable income when you make the contributions as well as some during retirement.
Provides options for different tax advantaged distribution strategies at different stages of retirement.
Diversifies your tax risk after retirement.
If you are a new employee and have a lengthy career ahead of you, consider starting with pre-tax contributions. Your contributions can grow tax-deferred, and your paycheck will see less of an impact. After you’ve been in the DCP for a few years, consider adding Roth (after-tax) contributions. These contributions help diversify your tax liability by giving you the choice of withdrawing from either your pre-tax savings or Roth (after-tax) savings.
If you have questions regarding your individual situation, be sure to consult with your tax and legal advisors.