I am a member of the Teamsters Union at my job. They offer a Tax Deferred 401K Plan, but also give you the opportunity to contribute “after-tax” dollars as well. I understand that “tax-deferred” means that I pay taxes on the money when I withdrawal it. With that being said, What would be the difference in “after tax” contributions and your standard Roth IRA? Or is there any? I will be 30 in Jan and having been putting money into my 401K for years(tax deferred) but I have recently wondering if I am making the right choice? Any thoughts?
Thank you all for your replies. So with all that said, what is the difference in post-tax and a roth ira? or is there one. I ask, because I have an IRA as well and have contemplating putting everything into it instead since my company doesn’t match. Any opinions would be great. Continue to do tax-deferred through payroll deduction or stop and start putting into my Roth Ira? Thanks again.
Justin
{ 4 comments… read them below or add one }
Beverly
The “best” option will be the “pre-tax” contributions into the retirement plan since the taxes are “deferred” until you withdraw the money many years in the future.
This saves you money now since you’re not taxed on those earnings currently especially since the investments’ earnings generally are compounding annually. Leave it alone for, say, 30 years and it’ll be quite large (assuming that you monitor the investments and choose “wisely” in investments).
Also, it’s also the matter with the time value of money. A dollar now will not be worth a dollar in the future due primarily to inflation.
Basically, you have more worth (buying power) in pre-tax dollars than in post-tax dollars.
Think of it llike this…
You want to invest $1,000.
Pre-tax dollars mean you have exactly $1,000 to put away for investment.
Pro-tax dollars means you must put more money from other sources to put away to match that $1,000 (assuming tax rate is fed 25% and state taxes are 9% so let’s round up to 30% taxes).
You would have $700 to put away and would need to fund $300 add. from other income sources, if any.
General investment rule… investment with Pre-tax dollars whenever possible!
Good luck!
Lorraine
if all variables stay equal, then it wont make a difference at tax time.
however, investing with pre-tax dollars has a potential advantage: most people have less income during retirement which can put them in a lower tax bracket and so pay less tax.
as an example: say you are married and you make $71,000 of taxable income this year. this means you will pay tax at the 25% rate on the amount over $63,700.
so on the last $7,300 you pay at a higher rate. but if you put it in a pre tax account it wont be taxed, yet. and you do this every year until you retire.
now, lets say you withdraw it during retirement. lets say you actually withdraw $63,700. guess what? it will not get taxed at the 25% rate it would have in your younger years because it would have been over the threshhold. now it gets taxed at 15% YOU JUST SAVED 10% IN TAXES.
Nicole
The record keeping on the 401K is relatively simple if you only have pre-tax contributions. The record keeping is a nightmare if you have a mix of pre and post-tax contributions.
Jerome
unless they call it a ROTH 401k then your contributions are after-tax but the earnings on it are PRE-TAX. You will still be taxed on the earnings when you take it out. In the ROTH you won’t be taxed on the earnings. FAR FAR FAR better to use ROTH than after-tax. For the majority of Americans a ROTH and a 401k are basically equal. However, by contributing to both ROTH and traditional 401k you cover your bets in terms of future tax increases or decreases.
so to answer your question….fund them equally up to the max IRA amount and then put any remaining amounts in 401k. Don’t fund 401k after-tax unless you’ve fully funded 401k AND ROTH IRA.
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