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Pre-tax and Post-tax 401k contributions
Posted on 11/3/14 at 10:51 am
Posted on 11/3/14 at 10:51 am
Employer offers both. Which one of these should I be doing and why?
This post was edited on 11/3/14 at 10:52 am
4
Posted on 11/3/14 at 10:58 am to GregMaddux
Pre-tax. Lowers your taxable income.
Posted on 11/3/14 at 10:59 am to Vrai
And the first response is terrible.
Posted on 11/3/14 at 11:09 am to GregMaddux
quote:
Which one of these should I be doing and why?
Is the post tax a roth 401K?
I'd assume yes, but it's important to know.
Posted on 11/3/14 at 11:12 am to LSU0358
Yes
Posted on 11/3/14 at 11:27 am to GregMaddux
Post tax is a good idea if you are early in your career with a lot of potential pay increases.
Pre tax is better when you are making more money because it lowers your taxable income.
You should aim to have a mix of both, as it will increase your financial flexibility in retirement.
ETA: Sorry, had it backwards the first time. Posting from phone.
Pre tax is better when you are making more money because it lowers your taxable income.
You should aim to have a mix of both, as it will increase your financial flexibility in retirement.
ETA: Sorry, had it backwards the first time. Posting from phone.
This post was edited on 11/3/14 at 1:28 pm
Posted on 11/3/14 at 11:31 am to TheHiddenFlask
quote:
You should aim to have a mix of both, as it will increase your financial flexibility in retirement.
I am young with decent salary. I have had a mix of both for a while but wasn't sure if this was the right thing to do as everyone automatically says "when have you ever seen taxes go down". Quite simplistic and incomplete reasoning.
Posted on 11/3/14 at 11:36 am to TheHiddenFlask
quote:
Post tax is better when you are making more money because it lowers your taxable income.
????
Post tax doesn't lower taxable income.
Posted on 11/3/14 at 11:43 am to Big Saint
Yeah, he had it backwards and it's confusing.
There's a lot that goes into this, but the only options worth considering are pre-tax or Roth. If you don't qualify for a Roth IRA, go pre-tax. If you do, likely recommendation is ore-tax 401k up to company match, then remaining funds available for savings into Roth. If you max Roth, switch back to Pre-Tax, if you max that, THEN go post-tax.
If you have a Roth 401k option, shite gets more complex in trying to project incomes and tax brackets.
As mentioned earlier, having a good mix in retirement is always a good plan.
There's a lot that goes into this, but the only options worth considering are pre-tax or Roth. If you don't qualify for a Roth IRA, go pre-tax. If you do, likely recommendation is ore-tax 401k up to company match, then remaining funds available for savings into Roth. If you max Roth, switch back to Pre-Tax, if you max that, THEN go post-tax.
If you have a Roth 401k option, shite gets more complex in trying to project incomes and tax brackets.
As mentioned earlier, having a good mix in retirement is always a good plan.
Posted on 11/3/14 at 12:03 pm to LSU0358
Both methods are tax free growth. One taxes you now vs the other taxing you later. For instance, I have money an IRA that I was looking at rolling to a RothIRA. After a close look it didn't matter much either way. The biggest thing to consider is your tax rate now (and through the course of your contributions) vs your expected tax rate in retirement.
You have to crunch numbers to reach a decision that's best for you. The toughest part is dealing with tax rates that might change by the time you retire and of course what return on your account you go with.
You have to crunch numbers to reach a decision that's best for you. The toughest part is dealing with tax rates that might change by the time you retire and of course what return on your account you go with.
Posted on 11/3/14 at 1:30 pm to LSU0358
quote:
Both methods are tax free growth
Nope. Traditional is tax deferred growth. Big difference.
You are correct in that the difference between the two is small, but in most situations, there is an advantage with the ROTH option from a pure after tax return perspective.
Posted on 11/3/14 at 4:24 pm to TheHiddenFlask
quote:
Traditional is tax deferred growth. Big difference.
I was referring to the account itself and its earnings during the contribution period (ie before retirement), I should have been more clear. Money being added to the account is taxed with the Roth401k and withdrawals are taxed with a traditional 401k.
quote:
You are correct in that the difference between the two is small, but in most situations, there is an advantage with the ROTH option from a pure after tax return perspective.
From what I could tell it all boiled down to the tax bracket one is in during the retirement years vs income in the contribution phase.
This post was edited on 11/3/14 at 4:29 pm
Posted on 11/3/14 at 4:44 pm to GregMaddux
Can you do both?
How much do you expect your taxes to be when you approach retirement?
How much do you expect your taxes to be when you approach retirement?
This post was edited on 11/3/14 at 4:45 pm
Posted on 11/3/14 at 4:52 pm to member12
quote:
How much do you expect your taxes to be when you approach retirement?
It's basically a WAG if one is many years from retirement. If you retire in a similar or lower tax bracket the traditional /post tax 401k is better. Many will be better off going traditional and actively managing withdrawals prior to RMD years while staying below higher tax brackets. That said, about half of our investments are in taxable and the rest tax deferred or Roth.
Posted on 11/3/14 at 4:53 pm to GregMaddux
There is no easy answer, because you are trying to determine what your marginal tax rate will be in 30-40 years, which is a determinent of what your income is then, and what tax rates are then.
There are some mathmatical calculations out there that show if your tax rate is the same now as it is in retirement, your tax burder will be the same over the long haul. Do you want to take the tax hit now or later? If your tax rate is lower in retirement, then a regular is better, if you think your rate will be higher in retirement, then go with the Roth 401K.
What I do: I hedge my bets. All employer matches/contributions go into the pre-tax account. So I put my contributions in the Roth, and the matches go into pre-tax, and I'll have some pools of taxable and tax-free income upon retirement.
There are some mathmatical calculations out there that show if your tax rate is the same now as it is in retirement, your tax burder will be the same over the long haul. Do you want to take the tax hit now or later? If your tax rate is lower in retirement, then a regular is better, if you think your rate will be higher in retirement, then go with the Roth 401K.
What I do: I hedge my bets. All employer matches/contributions go into the pre-tax account. So I put my contributions in the Roth, and the matches go into pre-tax, and I'll have some pools of taxable and tax-free income upon retirement.
Posted on 11/3/14 at 7:14 pm to LSUFanHouston
quote:
What I do: I hedge my bets. All employer matches/contributions go into the pre-tax account. So I put my contributions in the Roth, and the matches go into pre-tax, and I'll have some pools of taxable and tax-free income upon retirement.
This. If your going Roth with a match, you automatically get both, as the match can't be put in the roth.
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