Choosing between pretax and after-tax contributions to your 401(k) retirement fund is something participants need to decide very carefully. Why? Because it all comes down to “pay later” versus “pay now,” and as we all know, that can be a very critical decision.
When it comes to planning for your retirement, you need to start as early as possible. No one wants to be retired and poor – after all, what will you use to pay the bills when there are no more paychecks coming in? In order to plan for retirement, many people choose to put their money into a 401k retirement fund. They’re one of the most popular investment vehicles around. When you contribute to your 401k, you can make either pretax or after-tax contributions. If you decide to make pretax contributions, you will be helping yourself in the short term because the money you take out of your gross income and put into your 401k will lower your income, and thus put you into a lower tax bracket. That’s a good thing. The opposite is that when you go to withdraw money from your 401k when you’re older, it will be taxed.
If you decide to make after-tax contributions to your 401k fund, meaning you pay your taxes now, as you normally do, and then put the money into your 401k fund, you will be taking a big chunk out of your disposable income right now. The good news is that when you go to withdraw the money from your 401k fund when you retire, it won’t be taxed. All that money you put in will be yours, free and clear.
Managing your 401k retirement plan can be fairly complicated. To make sure you know what you’re doing, sit down with a financial adviser or a representative of your company’s human resources department and ask as many questions as you need in order to feel comfortable.