Need 401K advice. - Cat Forum : Cat Discussion Forums
 
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post #1 of 4 (permalink) Old 12-30-2005, 07:21 PM Thread Starter
 
Join Date: Apr 2003
Posts: 1,598
Need 401K advice.

I have decided for the new year to start a 401k plan with my company. I am clueless however. I can't decide whether to choose the before tax or after tax option. Help!!!!

After-Tax Deposits

If you choose to make deposits in the plan on an after-tax basis, the company deducts these deposits from your pay after taxes have been calculated. Therefore, after-tax deposits don't reduce your taxable income. Any earnings on your after-tax deposits aren't taxed until withdrawn or paid out.

Because you've already been taxed on your after-tax deposits, you won't be taxed again when you withdraw those deposits from the plan. However, you will be taxed on the investment earnings when you take a withdrawal.

Before-Tax/401(k) Deposits

If you choose to deposit to the plan on a before-tax basis, the company deducts deposits from your pay before most federal and state taxes are withheld. This reduces your taxable income for the year.

You don't pay taxes on your before-tax deposits and related earnings until you withdraw those deposits from your account.
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post #2 of 4 (permalink) Old 12-30-2005, 07:46 PM
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Join Date: Nov 2004
Location: Wisconsin, USA
Posts: 12,678
It depends on what your income is now versus what you expect your retirement income to be and what your marginal tax rate is now versus what you expect your marginal tax rate to be when you're retired. Since most of the time people expect to have a lower income when retired and therefore a lower marginal tax rate, it makes more sense to defer taxes until then. In that case you would want to take the second option: before tax deposits.

In reality, people have no idea what their income will be in retirement and even less of a clue what the tax rates will be, thanks to our fine legislators continually fiddling with the tax code. So then it boils down to whether you want to pay taxes on the income deposited in the account now or whether you want to pay it later, when you take it out.

In both options, you pay taxes on the GAIN in the account when you take the money out during retirement.
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post #3 of 4 (permalink) Old 12-30-2005, 08:29 PM
 
Join Date: Mar 2005
Posts: 1,652
I've always had mine taken out before taxes.
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post #4 of 4 (permalink) Old 12-30-2005, 08:36 PM
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Join Date: Aug 2005
Location: Minnesota
Posts: 1,355
I had read in "the Power of Money Dynamics" that any time you can avoid or delay a tax that is a good thing. That's the only option I have at work anyhow.

The Roth IRA is probally best for your after-tax dollars because I believe it has provisions for stuff like medical expenses and education, and that's something you should compare with your company plan.
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