When signing up for a 401k, is it best to have $ taken out of your paycheck before or after it is taxed?

Question

When signing up for a 401k, is it best to have $ taken out of your paycheck before or after it is taxed?

Answer 1

Do you mean that you have the choice of a regular or Roth 401(k) plan?  That's what those are by definition.

Answer 2

401k money is taken out pre-tax. it is taxed if you try to remove it from your 401k account before you are of retirement age. also, i suggest you put in the maximum amount that the company will match you, its FREE MONEY.

Answer 3

If you dont plan on touching it until you retire then dont take taxes out. Your tax bracket will be lower. Plus this will lower your over all taxes. Your take home pay will be larger.

Answer 4

They take it out before taxes, you don't get to chose.

Answer 5

before...you won't even "miss" the money

Answer 6

401k's are typically pre-tax

Whenever possible, I recommend a combination of both. Use the pre-tax through work and also establish a Roth IRA if you qualify.

Pretax now will be all taxable when you use it later and the opposite for the Roth. Since they are retirement savings plans, you may not want to have all the money you have left for your life be taxable because it will be depleted much more quickly. For example, you spend money to live from your 401k then you have to withdraw more to pay the tax on what you've spent. Then you're going to have to pay tax on what you've withdrawn to pay the tax, etc. It is a downward cycle of spending.

Answer 7

depends.  If you are young and at the beginning of your career and you KNOW the tax brackets are going to be higher then have them take the taxes out now.  If you're not sure or starting your 401k a little later in life (ie after 30) then do it after-tax.  

And don't just assume that tax rates have to be higher because of the war etc etc etc....tax rates are lower than they almost ever have been AND progress is being made by flat taxers.  Would  absolutely stink to pay taxes at 23% and then have them institute the flat tax where you would have only had to to pay 15%.

My best advice is to put them in both....70% in pre-tax and 30% in after-tax.  Create a little hedge so that you are covered no matter which way the taxes go.

Answer 8

You should take it out before tax.  If you can afford it, you can make a contribution post tax as well as you will not have to pay tax on the interest and dividends you earn while it is invested in the scheme.  You can do this once you have used up all your pre-tax allowance (approx. $15,500 I think).

Answer 9

In regular 401k you do not have a choice but the company automatically take money from your paycheck before calculating tax withholding, i.e. pre-tax contribution.  

Since 2006 some companies begin to offer Roth 401k where you can contribute after-tax money.  This means you are taxed on your entire amount before the contribution is taken from your paycheck.

Either way, the money doesn't come to you but directly to the custodian of the company's 401k program.

If you are young and sounds like you are, you should contribute to Roth 401k.  Because your pay tax now on the contribution but no tax when you take them out.  Your money has a long time horizon to multiply a few times before retirement, you'll avoid paying tax on much larger amount compare to the amount of tax you pay now.

Furthermore, once your Roth 401k is 5 years old you can take out contribution (your base) to Roth 401k without tax or penalty.  Not that I would recommend taking money out of retirement account, but in case you do need to money for emergency.

In either traditional or Roth 401k, you should contribute at least as much as your company will match your contribution, usually 6% of your compensation.  Although the match will become vested over time of service, it is still free money.  

Feel free to contact me directly if you have more questions.

Best wishes.