- quote -

The IRS allows an employer to offer after-tax contributions to a 401(k)
although I'm not sure that this practice is widespread. I have worked
for a company that offered it, but I did not use it for the same reason
you stated, there's not much advantage. For gross tax purposes this is
the same as investing in a non-deductible traditional IRA.

- quote -

You're absolutely correct, with this interpretation there is no
difference. I was working off of a different interpretation because the
OP's first sentence was, "I need to decide whether I should contribute
to my 401k on a pre-tax or after tax basis." But rereading the post,
maybe your interpretation is correct.

Sorry for the confusion,
-Will

Greg Hennessy wrote:
- quote -

Greg, I wasn't referring to your post, I was referring to Will's. I was
also assuming that the OP was comparing Roth IRA to 401K.

By the way, to add to the confusion, Roth IRA is considered as "after
tax" because you contribute to it "after tax" (it is confusing because
you pay the taxes beforehand). And likewise, 401K is "pre tax" because
you contribute "before taxes", even though you pay taxes "after"
withdrawing.

In article <1104366543.623302.227820[at]c13g2000cwb.googlegroups.com> ,
Bucky <uw_badgers[at]mail.com> wrote:
- quote -

No, I wasn't trying to say that. I was trying to compare a pre tax
Roth IRA situation with an after tax 401K situation, and did not do it
clearly.

Will Trice wrote:
- quote -

I'm no expert on 401K, I didn't know you could contribute to 401K after
tax. Are you saying that you can contribute to 401K after tax, but then
you still have to pay tax on the earnings when you withdraw? That's
barely an advantage over just investing without a special account. If
this is the case, why would anyone contribute to 401K after tax?

I was assuming the the OP meant pre-tax Roth IRA or after tax 401K
because he said "My monthly 401k plus ira contribution will total
around $800." Given that assumption, then it makes no difference as
long as the tax rate is the same. With the Roth IRA, you don't pay tax
on earnings.

Greg Hennessy wrote:
- quote -

Your first example missed the tax on the earnings withdrawn. So, you
save $100, pay the 20% tax leaving $80 invested and it doubles after 20
years to $160. Upon withdrawal, you then pay 20% on the earnings or
0.2(160 - 80) = $16 leaving $144. This is less than the pre-tax amount
of $160 you showed in the second example.

In article <41D31791.1030306[at]paragondynamics.com> ,
Will Trice <wwtrice[at]paragondynamics.com> wrote:
- quote -

It is true, because in the after-tax situation you pay tax on the
growth as well.

Say you earn 100 bucks. You pay the tax 20%, invest in the 401K for 20
years, doubling your money, so you have $160 bucks.

In the post tax situation you get the 100 bucks, invest it for 20
years doubling your money (you now have 200), now you pay the 20% tax,
which leaves you with $160.

- quote -

For a 401(k) this isn't true. The pre-tax will end up with more money
than the after-tax. This is because the amount you pay in tax up front
does not get to grow in the after-tax account.

-Will

s o wrote:
- quote -

Assuming your tax bracket stays the same, pre-tax and after-tax will be
the exact same. However, the tax bracket after 30 years will most
likely be different than it is now. Many experts predict that taxes
will be higher in the next few decades. If you agree with them, then
you should pay the tax now.

Hi,

I need to decide whether I should contribute to my 401k on a pre-tax or
after tax basis. I'm 33 and in the 15% bracket now. I'm saving
quitely aggresively. My monthly 401k plus ira contribution will total
around $800. According to my spreadsheet, in 30 years with a return
rate of 9% to 10%, I should have more than $1 million. If I withdraw
under careful planning in my retirement years as not to put me in a
higher bracket than I'm in now. In this case, pre-tax or after tax is
pretty much just a wash, am I right? unless I reinvest the tax savings
each year, otherwise might as well take the hit now? Can anyone tell me
if I'm thinking in the right direction? what else should I consider
when making this decision? Thanks.

s o