Difference Between Before Tax and After Tax 401K

By: | Updated: Aug-13, 2022
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Your responsibility to pay taxes on your income is both exciting and nerve-wracking. There are many reasons for this, but the most important is that it gives you a sense of pride in knowing that you’re contributing to the community and helping those who need it most.

However, if you’re thinking about contributing to a 401(k) plan at work, it can be overwhelming to figure out how much you should contribute, what kind of investment options are available, and how you should report your contribution on your tax return. To help clear up any confusion regarding the differences between before-tax and after-tax contributions, we’ve put together this guide.

Summary Table

Before Tax After Tax
Contributions that you make to your 401(k) plan before taxes are taken out Subject to taxes when you withdraw them from your 401(k) plan
Allows you to make pre-tax contributions Allows you to make contributions that are subject to taxes
Lower tax bracket Higher tax bracket

Difference Between Before Tax and After Tax 401K

In this article, we’ll discuss the difference between before-tax and after-tax contributions. We’ll also cover the difference between a traditional 401(k) plan and a Roth 401(k) plan.

What is Before-Tax 401(k)?

Before-tax contributions are the amount of money that you contribute to your 401(k) plan before any taxes are taken out. The way it works is that the money is taxed before it goes into your 401(k) plan.

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What is After-Tax 401(k)?

After-tax contributions are the amount of money that you contribute to your 401(k) plan after taxes have been taken out. After-tax contributions are invested and taxed only when you withdraw them from your 401(k).

The Similarities Between Before-Tax and After-Tax Contributions

Both before-tax and after-tax contributions have the same purpose: to allow you to save for retirement. You’ll both receive a matching contribution from your employer and contribute the same amount to your 401(k) plan.

Before Tax VS After Tax 401(k)

Now, let’s take a look at the differences between before-tax and after-tax contributions.

The contributions

Before-tax contributions are contributions that you make to your 401(k) plan before taxes are taken out. In other words, these are contributions that you deduct from your taxable income before taxes are calculated. Before-tax contributions can be used to pay for qualifying education expenses, which is why most companies offer this option.

After-tax contributions are different from before-tax contributions in that they are subject to taxes when you withdraw them from your 401(k) plan. As a result, you may have a lower overall after-tax amount than you would have if you contributed using pre-tax dollars.

Investment options

Before-tax contributions come with a wide variety of investment options. You can choose between the traditional 401(k) plan and the Roth 401(k) plan. Before-tax allows you to make pre-tax contributions, but if you’re not covered by a retirement plan at work, you can also choose to make after-tax contributions. This means that after-tax allows you to make contributions that are subject to taxes when you withdraw them from your 401(k) plan.

The 401(k) plan tax treatment

Before-tax contributions are deducted from your taxable income before taxes are calculated. This means that before-tax contributions will be subtracted from your taxable income before taxes are calculated. In other words, the after-tax contributions you make to your 401(k) plan will not be taxed.

On the other hand, after-tax contributions are subject to taxes when you withdraw them from your 401(k) plan. As a result, if you’re in a higher tax bracket, you may have a lower overall after-tax amount than you would have if you contributed using pre-tax dollars.

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