Solutions 4 Financial Independence: 10/30/18

Published: Oct. 30, 2018 at 9:03 AM EDT
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Question: Today’s question comes from Monica from Clarksburg. Monica writes “I just started a new job. My new employer offers the option to do pre-tax or Roth contributions to our 401k plan. Which one should I do?”

John Halterman: Well Monica, I’m glad that you’re getting involved, because you know, saving for your retirement is critical. You know, there is very few people, believe it or not, that are actually saving enough money to maximize their retirement. In regards to pre-tax vs. Roth, pre-tax basically means that your contributions will go on a little bit of a tax deduction for those, the Roth 401k is going to be after tax. For both of them, the tax is going to go tax deferred, but the pre-tax is going to be taxable to you as you take it out as earned income, whereas the Roth 401k is going to be 100% tax free, and as you all know, I love tax free. Now Monica, here's what I always tell people, if you are single, and your making under $100k, or your married, and making under $200K, you may want to forgo the tax deduction today, because the tax free is going to give you more money down the road. I get in the short term that everyone thinks "oh, I'm going to get a deduction,” but the reality of it is, that you're going to pay taxes on that down the road. So, a lot of times, the tax deduction, unless you’re above those income levels, are just not worth it. So, depending on how much you make, it’s going to depend on which way you should do it, but look at your income threshold, that's going to be a big deal, and remember, tax free, not a lot of things in this world give you tax free money.