What is the difference between my "pre-tax" and "after tax" contributions?

Asked by Brady

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Answered by Martin Leclerc, Financial Adviser in Bryn Mawr, PA
A pre-tax contribution is the amount taken from your gross wage and placed into your 401k account before taxes have been deducted. By making pre-tax contributions, you are potentially lowering your current taxable income.

For example, if you earn $75,000 and make a pre-tax contribution of 10% into a 401k account, then your current taxable income is lowered by 10% x $75,000, or $7,500. Instead of paying taxes on $75,000, you will be paying taxes only on $67,500. (And you have saved $7,500 towards retirement!)

An after-tax contribution is made from your earnings after taxes have been paid.

In both cases, however, you will potentially benefit from the power of long term, tax-deferred compounding.
| 12.04.13 @ 22:51
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$commenter.renderDisplayableName() — {comment} | 12.09.16 @ 14:03
Brady, the only thing I would add, is right now many 401k providers offer ROTH 401k option. Where you contributed with after tax money however your earnings are growing tax free vs tax deferred. The after tax contributions in the past were introduced to help highly compensated employees put more money a way for retirement. Typically you would max out your pre tax contributions and then go to after tax. However, as I said earlier, many 401k plans now offer a Roth 401k as an option which might be worth exploring.
Best of Luck
Sincerely
Michael Mezheritskiy
Founding Partner, Visionary P.W.M.G | 12.20.13 @ 16:44
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$commenter.renderDisplayableName() — {comment} | 12.09.16 @ 14:03
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