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!!!!
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 Any earnings on your after-tax deposits aren't taxed until withdrawn or paid out.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.
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.