View Full Version : Before-Tax or After-Tax ?

2-8-12, 11:07pm
In planning for retirement, is it better to put your stuff in pre-tax or after-tax vehicles?

pay taxes on your retirement savings now and not when you take it out during retirement


do not pay taxes on it now, but pay on it when you withdrawl it in retirement?

2-9-12, 6:09am
Well like anything else in life, it depends. The nice thing about investing in pre tax vehicles is that you have a larger share to invest than you would with post tax vehicles and over time this can make a big difference assuming the same rates of return. The nice thing about investing in post tax vehicles now, is that the taxes part of the equation is already handled and you won't have to deal with it later (although I question whether congress won't change this later, or do some sort of means testing). Also depends on expected tax brackets upon retirement, the conventional wisdom is that you'll be in a lower bracket when taking the money out, but that may not be true for you.

2-9-12, 6:44am
We balanced between the two based on our goals and plans on how to reach them. We always maxed out the 401K to receive any matching funds. Then we discussed what else we had and where to put it. Once, a long time ago, we thought we might want a motor home and started a savings account for that purpose. We later changed our mind but enjoyed having the savings account so it became our after tax savings and for 25 years we have called it the motor home account. Now that we are retired, it ended up that about half of our money is before and half is after tax.

Any attempt to predict Congress is gambling. We follow the balanced approach. We even have a balance between stock/bonds and cash. Because we believe in balance, when my husband reached 50, we sold all the stock that the company had put in the 401K and put the money in an IRA (allowed by plan). Not good for our balance method to have health insurance, retirement and retirement savings all in one pot. Good thing because stock went from $100 to $35 and most of the other employees rode it down. We will never make the extreme highs in return with this approach but over time we have earned a steady return.

2-9-12, 2:10pm
I knew that i would be in a much lower tax bracket when I retired since I would have a paid off house and no debt and fewer needs (had medical stuff covered for life), so I choose the put my money into tax deferred things like Traditional IRA's and a 457 (like a 401K for government employees). I will have to pay taxes on them when I start collecting them, but I can live on a small amount of money in retirement so that I will only need to withdraw a small amount each year - keeping me in a low tax bracket - maybe even in a zero tax bracket. If I thought that I would need a higher income in the future, then I would have put it in Roth IRAs or some other taxed investment so I could pay lower taxes in the future. So I guess the question for you is - will you have a higher income when you retire then you do now?

Blackdog Lin
2-12-12, 8:36pm
I can do a thrifty household budget like nobody's business, but I have only a vague and rudimentary understanding of investing/tax angles. So for us, I just asked myself some simple questions.

1. Do I think we'lll have less money (be poorer) in retirement than now during my paycheck years? Yep. We're sure we'll be fine, we have plans to live even "lower on the food chain" than we do now, and have a good life and some fun doing it, but we will be making do with less money.
2. Given that, do I want to pay taxes on my savings now or later? For me, the answer is now, while we have the extra discretionary income.
3. Given that, I choose to go with Roth IRAs for us. After-tax monies. I'd rather we pay taxes on our savings now, rather than later when I plan to have less.

It isn't the most sensible or money-saving idea, it's just what I've come up with for our situation.