Is it better to invest in your companies 401K plan with pre-tax or post-tax dollars?

Answer 1

Pre-tax for sure, and even then, only if the company matches it. With post tax dollars, unless they're matched, there's pretty much no reason to invest in your company's 401k plan.

With a little education, you don't have to use your company's plan. You can put it into a self directed IRA (with pretax dollars) and do at least as well as your company's 401K yourself!

The reason is that with a self directed IRA, you can still invest in anything the company's 401K allows, but w/o restricting yourself to just those funds. Additionally, you can invest in ETFs, stocks, and a whole bunch of other instruments that you can't typically with a company plan.

Back to pre vs post tax. Use pretax for the company plan because your monies will grow until retirement and then be taxed, plus most require you to use pretax dollars in order to be matched.

However, (as a sidenote), with your first few dollars, opening a ROTH IRA with post tax monies is a great tax advantage because those monies grow and grow and you keep all of it.

Sorry for the long answer, but hope it helps!

Answer 2

With pretax dollars. That's one of the biggest advantages of a 401K, that the money taken from your salary to invest is not taxable. If you take the same amount of money, pay taxes on it and then invest, your investing 20% or 30% less (what ever your tax bracket is) than what you would have been before taxes.

Answer 3

First, I'm assuming that by post-tax you are talking about a ROTH 401k deduction. If not and it's a regular after-tax account, then pre-tax is the way to go. But if you are then it depends on your age and your income level. If you're older and your income level already puts you in a higher tax bracket then it makes little sense to use the ROTH option except to possibly diversify your distribution options. In order for a Roth after tax contribution to be worth the trouble is if you already are in a relatively low tax bracket and you have time to overcome the loss of the tax deduction. It's not the end-all be all...and, in fact, for most of America it's a wash tax wise...the ill informed think it's a no-brainer.

Answer 4

There are only 2 reasons to ever invest in your companies 401k... because you can do it Pre-Tax and if they Match any of your contributions. If you make 50,000 a year and you invest 5,000 pre-tax then you only pay taxes on 45,000.... but if you make 50,000 and invest 5,000 post tax, then you pay taxes on 50,000.

Answer 5

This kind of depends. You can use post-tax dollars if you're assured that when you draw from the 401(k) you aren't taxed again on them. Then it may be advantageous since it is feasible to assume that when you are going to take the money out you could be in a higher tax bracket.