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When contributing to a 401(k) plan via paycheck deduction, one may contribute to an after-tax 401(k), a Roth 401(k), or (the or is non exclusive) a traditional (a.k.a. pre-tax) 401(k).

In one employer's Vanguard 401(k) plan, I read the following in the form where the employee specifies the paycheck deduction:

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In the line Roth 401K DEFERRAL: what is being deferred?

I understand that for the PRE-TAX 401K DEFERRAL, the income tax is being deferred to whenever one withdraws the money, but I don't see what is being deferred for a Roth 401(k).

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The "Deferral" for the 401k means that you're not collecting your pay immediately, but instead diverting it to a retirement account (Roth 401k in this case).

This article defines deferral well:

What is the difference between a regular 401(k) deferral (pre-tax) and a Roth 401(k) deferral?

Under either a regular 401(k) deferral or a Roth 401(k) deferral, you make a deferral contribution by electing to set aside part of your pay (by either a certain percentage or a certain dollar amount). For a regular 401(k) deferral, the taxable wages on your W-2 are reduced by the deferral contribution; therefore, you pay less current income tax. However, you will eventually pay tax on these contributions and earnings when the plan distributes the regular 401(k) deferrals and earnings to you. The result is that the tax on the regular 401(k) deferrals and earnings is only postponed.

A Roth 401(k) deferral is an after-tax contribution, which means you must pay current income tax on the deferral. Since you have already paid tax on the deferral, you won’t pay tax on it again when you receive a distribution of your Roth 401(k) deferral. In addition, if you satisfy cer tain distribution conditions, then you won’t have to pay tax on the earnings either. This means that the distribution of the Roth 401(k) earnings can be tax free not just tax postponed.

Traditionally, this deferred compensation typically was directed to a 401k, but now that Roth 401k is another available option, deferred compensation can be directed there as well.

  • Thanks. Shouldn't the after-tax 401(k) contribution also be referred as a deferral then? – Franck Dernoncourt Nov 12 '17 at 7:04
  • had to look it up. The difference is in after-retirement treatment. * Roth withdrawls are 100% tax free * After-Tax 401k withdrawls have taxes due on earnings. – Michael Nov 12 '17 at 22:02
  • @FranckDernoncourt, yes - generally, any contribution from your pay that is diverted to a retirement account could be referred to as a deferral. – JW8 Nov 13 '17 at 4:33

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