I have a 401K plan at work. It gives me the option to select contribution percentages for both?

Question

PRE-tax and AFTER-tax dollars.

If I contribute $$ using AFTER-tax dollars, would that have the same principals as the ROTH IRA or other ROTH plans in general?

Would my AFTER-tax contributions into my 401K plan grow tax free and also be TAX free when I go to withdraw it?

Thank you.

Answer 1

With the tax laws as the exist today, I would go with after tax and the Roth.  You income should increase over time and you then would probably be better served to with pre-tax under what is now referred to in IRA talk as a traditional IRA.  You need to think about changes in the tax laws, if there is major shakeup in the November elections.  But, you are fine for tax year 2008.

Answer 2

the ROTH IRA means you don't pay taxes when you withdraw your money, but you don't take a deduction.  Usually the caps determine whether or not you will be taxed when you withdraw.  You ought to look at the benefits of using plans that will let you draw tax free but no present deduction or present deduction but no tax free draw.  Most people are broke when they retire or  pretty close and a 0-5% savings on tax really doesn't do much for them.  You need to ask the administrator what the plan does for you, and be certain your money is not invested in the company, that is another good way of losing your savings.  Amost every single plan does allow for tax free investment growth, but the same is not for withdrawals upon retirement.

Answer 3

No. Any AFTER tax contributions to a 401k or traditional IRA are taxable at time of withdrawal the same as pre-tax contributions.  You can't get two different tax treatments in the same account.  The benefit is that dividends and capital gains distributions are tax exempt while the funds are still in the account.  So no tax bill at the end of the year.

Answer 4

yes the rules all stay the same pre or post tax you aRE ALLOWED ONLY A CERTAIN AMOUNT TO CONTRIBUTE YEARLY I BELIEVE IT IS 4,000 YEARLY BUT MAY HAVE INCREASED AND YOU WILL BE TAXED ON ANY WITHDRAWALS BEFORE THEIR MATURITY DATE (UNFORTUNATELY)

Answer 5

I don't know, but I am interested in the answer.  The only tidbit of info I do have is that in most cases you should be contributing at least the maximum amount the company is willing to match.  I'm guessing you already knew that.

Answer 6

No. After-tax contributions are not the same as Roth contributions.

If you contribute both pre-tax and after-tax money, you will be assessed taxes on the "pre-tax" and "company match" money. The pre-tax money consists of pre-tax contributions, earnings on the pre-tax and after-tax contributions, and company contributions. The after-tax contributions contributed can be withdrawn without being taxed again.

Example: You contribute $1000 pre-tax and $1000 after-tax. The account has made $200 in earnings ($100 pre-tax, $100 after-tax). If you take the entire distribution in cash, taxes will be calculated on $1200 dollars. $1200 is the "pre-tax" or taxable portion ($1000 pre-tax contributions + 200 of earnings which have not yet been taxed).