Pre-tax vs. Post-tax retirement contributions
When saving for retirement, one important decision you’ll need to make is whether to make pre-tax or post-tax contributions to your retirement accounts. Here’s what you need to know:
Pre-tax contributions:
– You contribute money to your retirement account before taxes are taken out of your paycheck.
– This reduces your taxable income for the year, so you pay less in income taxes.
– When you withdraw money from the account in retirement, you’ll owe income taxes on the amount withdrawn.
– Examples of pre-tax retirement accounts include traditional 401(k)s and traditional IRAs.
Post-tax contributions:
– You contribute money to your retirement account after taxes are taken out of your paycheck.
– This does not reduce your taxable income for the year, so you pay the same amount in income taxes.
– When you withdraw money from the account in retirement, you will not owe income taxes on the amount of your contributions (since you already paid taxes on that money), but you will owe taxes on any earnings on those contributions.
Examples of post-tax retirement accounts include Roth 401(k)s and Roth IRAs.
So which option is right for you? The answer depends on your individual situation. Generally, if you expect your tax rate to be lower in retirement than it is now, you may want to consider making pre-tax contributions. If you expect your tax rate to be higher in retirement, you may want to consider making post-tax contributions.
It’s important to note that there are limits to how much you can contribute to retirement accounts each year, and these limits differ depending on the type of account. A financial or tax professional can help you determine how much you’re allowed to contribute and which type of account is best for you.
In summary, when it comes to pre-tax vs. post-tax retirement contributions, there is no one-size-fits-all answer. It’s important to consider your individual situation and consult with a professional to make the best decision for your retirement savings.