What are after-tax contributions and under what circumstances should I consider making them?
Perhaps the best way to answer this question is to look at the following comparison between pre- and post-tax 401(k) contributions. By the way, not all employers permit after-tax contributions to their 401(k) plan. Check your Summary Plan Description to find out if after-tax contributions are allowed. Pre-tax Contributions: Both the contributions you make to your account and the investment gain continue to grow tax-free until you withdraw money from your account at retirement. As you take money out of your 401(k), you pay taxes only on the amount you withdraw (so that at retirement, taxes don’t come due on your entire account balance at once). Because your 401(k) contribution is deducted from your compensation before taxes are calculated, your taxable income is lower, so you pay less income tax. If you withdraw money from your 401(k) account before age 59 you will generally have to pay a penalty. The penalty will not apply in the cases of a qualified hardship as defined by the IRS, if
Related Questions
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- What are after-tax contributions and under what circumstances should I consider making them?
