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Some suggestion is that if we plan to have lower tax bracket when we retire, we can contribute into 401(k) pre-tax instead of after-tax.

However, if some people may contribute $60,000 into either pre-tax or after-tax, then when they retire, if it has $1.5 million, then they may end up with $1.2 million after paying tax, versus if people contributed for after-tax, they have $1.5 million, and it is always $1.5 million. They don't have to worry about tax for it at all.

So is it true that we may consider after-tax even if we think our tax bracket is low after retirement?

But one exception may be: I can't recall if it is after-tax, is it true that some company may not match your contribution, say, at 100%. If it is 100%, then you may considered it "paying for your tax" already, because if you have $100 and the company contribute $100, then you have $200. Even after paying tax, you may still have $120, so it is better than paying tax for you.

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  • It is not possible for an employee to contribute $60K to a 401(k) plan in a single year. May 26, 2020 at 15:46

2 Answers 2

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Your assumptions are mostly right, but you are missing some critical points:

If you contribute post-tax, you will have less money to contribute, so you will end up with a lot less in the account.
In other words, 1.5 mio post-tax is certainly better than 1.5 mil pre-tax, but to have 1.5 mil post-tax, you need to originally have maybe 2 mio.

At one point in time, you have to pay tax on it, and a) paying a lower tax rate (when you are retired) is obviously better, and b) the larger amount creates larger gains (which are taxable, but still larger) - you are basically allowed to invest the IRS's share of the money, and keep the gains.

Another point is that employer matches are always pre-tax, even if you contribute post-tax. They do not pay your taxes for you.

Overall, the topic is quite complicated to fine-optimize, and there are hundreds of details to consider that might differ for you from others.

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    "If you contribute post-tax, you will have less money to contribute, so you will end up with a lot less in the account." This is only true if you can't afford to contribute the max post-tax.
    – GendoIkari
    May 26, 2020 at 19:34
  • right... I was thinking some people can contribute that much (or the max) even for post-tax. If they don't they just spend it all anyway. May 26, 2020 at 21:50
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Just for an example, say you're in the 20% tax bracket now. Contribute 60K to a traditional IRA, and after 30 years at 4% interest, it grows to 198K. If you contribute to a Roth, then that 60K becomes 48K after taxes, and after 30 years you only have 149K.

Of course you can use a financial or spreadsheet, and run endless scenarios, plugging in whatever values you think might apply to you. Perhaps your disposable income is high enough that you can easily afford the extra $12K in tax, or perhaps you can only afford to put money in a retirement account because it is pre-tax.

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    How does one contribute $60K to an IRA? The annual limits are about a tenth of that. May 26, 2020 at 15:43
  • @DilipSarwate Contribute over multiple years...
    – Brady Gilg
    May 26, 2020 at 20:33
  • you can contribute 401(k) and IRA combined for as much as $70k per year if over 50... about $7000 less if under 50 May 26, 2020 at 21:52
  • my assumption is not to contribute $48k after-tax. My assumption is contribute $60k even after-tax. May 26, 2020 at 21:53
  • @Dilip Sarwate: Bribe your Congresscritters so they write an exception to the law for you? Seems like this is an irrelevant nitpick to an answer that is simply trying to explain the math.
    – jamesqf
    May 27, 2020 at 16:01

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