What is the difference between investing pretax and post-tax contributions?
Pretax contributions and their earnings are taxed only when you withdraw them. Since the money that would normally be paid in taxes is part of your contribution into the plan, your money adds up quickly. However, if you need to withdraw money prior to age 59 1/2; you may incur a 10% penalty, and owe income taxes on the money you take out. Post-tax contributions (e.g., “Roth” contributions) are taxed before they are put into the plan. Although you won’t owe taxes on your contributions when you take a distribution, you will be taxed on the earnings and may be subject to a penalty on the interest earned if you take your money out of the plan before age 59 1/2.
