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At the company where I work, I have three options for contributing to my 401(k).

  1. Before Tax
  2. Roth
  3. After Tax

I'm not sure if I totally understand what each of these means. This is what I am thinking happens. The money that I contribute Before Tax is eventually taxed when I withdraw from my 401(K) when I retire. The money that I contribute to Roth and After Tax is taxed up front, and when I retire, it is not taxed.

If this understanding is incorrect, then let me know.

Otherwise, here is my question. If I am less than two years into my working career, is it smarter to contribute to Roth/After Tax (as opposed to Before Tax) because I make a comparatively smaller amount than when I retire?

I have asked others about this, but I don't think I am understanding the particulars of this, and it would really help if someone explained this to me clearly.

On a somewhat-related note, my company matches my contributions to a point, and that is done Pre-Tax. If I contribute 6% or more of my salary, they will contribute equivalently up to 4% of my salary.

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  • Just beware that Roth and after-tax could mean different things. Roth means it's taxed up front but not when you withdraw. After-tax could be synonymous with Roth or it could mean it's taxed up front and also earnings on those contributions when you withdraw.
    – Craig W
    Mar 3, 2017 at 22:50
  • @CraigW: In the context of 401k, "after-tax" always means after-tax Traditional 401(k) contributions, which are not subject to the $18k limit.
    – user102008
    Mar 4, 2017 at 1:07
  • @user102008: Correct. I was mostly just pointing out you'd probably never want to do after-tax contributions before you max out your Roth contributions.
    – Craig W
    Mar 4, 2017 at 1:26

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Young vs old doesn't really make a difference. What's in play in the Roth/After Tax vs Traditional/Pretax decision is your current marginal tax bracket versus your probable taxation in retirement.

Since your company matches something on the pretax account it makes sense to max out the pretax contribution match amount before considering roth contributions. If the match is something like 50% of your contribution up to 3% of your salary, that's an instant 50% return on your contribution and you can't really beat that.

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  • If I contribute (pre-tax or after-tax) at least 6% of my salary, they will contribute 4% of my salary. Mar 3, 2017 at 19:57
  • The assumption here is that any tax savings are also invested - if you invest the same amount, a Roth is better since the amount of tax paid today will be much less that the tax paid when you withdraw the money at retirement.
    – D Stanley
    Mar 3, 2017 at 20:24
  • @DStanley - "tax paid today will be much less that the tax paid when you withdraw the money at retirement" - likely, but not guaranteed. Get disabled at 30, and you'll withdraw the first $19,725 at a top marginal 10%, the first $10,400 of that, tax free. Your comment is most often correct, but not 100% guaranteed. Mar 4, 2017 at 14:23
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    @JoeTaxpayer My point is that roth vs traditional IRA should not just be based on current vs future tax rates, unless you also invest the tax savings. The tax-free growth is what makes the IRA a better option generally. You are correct that certain situations might make it different, though.
    – D Stanley
    Mar 4, 2017 at 15:15
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    @quid - amazing. This twist didn't occur to me. Even at 15% marginal rate, if one has just $1000 to put in, and will get 100% match, by going Roth, they put in $850 and get $850 match. $1000 pretax gets the $1000 match. For those on the line, it makes sense to deposit pretax, and if/when they have funds, convert. Mar 4, 2017 at 17:01

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