Workplace Savings Plan Question?

Question

Which would be better - having the deductions pre-tax or after tax? I know that the taxes when I retire would be higher if I were to have the deductions pre-tax now, but I don't know which option is best in the end.

While I'm at it, what defines a 401k? I think what I have is one, but I'm so horrible with these things and the phrasing they use is so confusing =(

Answer 1

Almost all the employer savings plans are done on a per tax basis. The one plan that comes to mind thats done on an after tax basis is the newly establishe ROTH 401k plans. They are so new that most employers dont have them, nor do they know of their existence.

A 401k plan is simply a retirement account. You can put a certain percentage of your salary into it or a max of $15,000 if under age 50. It depends on the plan as to what your limit is on the amount you put in. All 401k plans are per tax. That means you are not taxed on the amount you put in upfront but you will pay taxes when you withdraw it for retirement. In a Roth 401k or Roth IRA that is funded with after tax dollars you pay the taxes upfron and when you draw out for retirement its 100% tax free.

Other savings plans are FSAs, HSAs, Simple IRA plans, and a few others. Each is different and taxed differently as to what the monies are used for.

Over the long term its best to pay the taxes up front because the tax rates are goign to go up in the future. They are already going to go up by 50% for the lowest wage earners on 1/1/2011. The top rate will go up by just over 11% on 1/1/2011. Taxes are headed higher, there is no escaping that fact. Best to save in these types of plans first and in this order if you qualify. Health Savings Account. Money is per tax AND comes out tax free. Roth IRA. Money is taxed upfront but all earning are tax free when you withdraw at retirement. ROTH 401k. Monies are treated like Roth IRA.

Answer 2

First, schedule a meeting with HR and tell them that you want to better understand the retirement plan/options.  Ask for a full hour, because it sounds like you could use the help (no offense meant - we all need help when we don't understand things).  If you still don't get it, schedule a meeting each week until you DO get it.

Depending on the size of your company, HR may be able to set you up with a seminar or something - most large companies hold HUGE retirement seminars at least twice a year, at no cost to employees (the time off probably won't even be taken out).  Now that companies are starting to take on fresh college grads, there's probably a LOT of training and help available.

A 401(k) is a tax-advantages retirement account offered by your employer.  Ask about the plans that your company offers.  Specifically, ask them if they offer a "Roth 401(k)" - a new kind of 401k that lets you contribute after-tax dollars.

No matter what, you should definitely invest however much you need to in your 401k to get the full match.  After that, fund an IRA as much as you can (up to $5k this year if you aren't old enough for the match).  If you still can afford to invest after that, pile in more and more money into your 401k.

The decision about whether you should take pre-tax or after-tax dollars really depends on your age more than anything.  If you're in your 50s, you should probably make a pre-tax contribution, and get the tax write off this year.  If you're in your 20s or 30s, it's definitely worth it to use after-tax dollars.  If you really like the tax write-off, but want to let your money grow tax-free, too, then do a combination of traditional (pre-tax) and Roth (after-tax).  But check into the income restrictions on the Roth accounts - if you make too much money, this may be a moot point.

Answer 3

They will tell you what type of plan it is.

For a 401(k) pretax is always better. If you invest after tax money, in a low tax bracket of 15%, after tax you have 85 cents to invest. Pre tax you get to invest the whole dollar and make money on the tax you did not pay. At a 25% tax rate the benefit is higher since you only get 75 cents for every dollar you earn.

Generally companies that match your money for retirement, like up to 5%, or something, only match pre tax dollars. Generally the after tax provision is used for extra savings, not retirement savings.

You will want to sign up for depositing at least an amount equal to what they will match because that is free money. If you don't you are leaving money on the table.

And depositing PreTax money also lowers your taxable income and can keep you out of a higher tax bracket when you get raises. So you save money at tax time too.

Good Luck