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Some suggestion is that if we plan to have lower tax bracket when we retire, we can contribute into 401(k) pre-tax instead of after-tax.

However, if some people may contribute $60,000 into either pre-tax or after-tax, then when they retire, if it has $1.5 million, then they may end up with $1.2 million after paying tax, versus if people contributed for after-tax, they have $1.5 million, and it is always $1.5 million. They don't have to worry about tax for it at all.

So is it true that we may consider after-tax even if we think our tax bracket is low after retirement?

But one exception may be: I can't recall if it is after-tax, is it true that some company may not match your contribution, say, at 100%. If it is 100%, then you may considered it "paying for your tax" already, because if you have $100 and the company contribute $100, then you have $200. Even after paying tax, you may still have $120, so it is better than paying tax for you.

Chris W. Rea
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nonopolarity
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2 Answers2

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Your assumptions are mostly right, but you are missing some critical points:

If you contribute post-tax, you will have less money to contribute, so you will end up with a lot less in the account.
In other words, 1.5 mio post-tax is certainly better than 1.5 mil pre-tax, but to have 1.5 mil post-tax, you need to originally have maybe 2 mio.

At one point in time, you have to pay tax on it, and a) paying a lower tax rate (when you are retired) is obviously better, and b) the larger amount creates larger gains (which are taxable, but still larger) - you are basically allowed to invest the IRS's share of the money, and keep the gains.

Another point is that employer matches are always pre-tax, even if you contribute post-tax. They do not pay your taxes for you.

Overall, the topic is quite complicated to fine-optimize, and there are hundreds of details to consider that might differ for you from others.

Aganju
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    "If you contribute post-tax, you will have less money to contribute, so you will end up with a lot less in the account." This is only true if you can't afford to contribute the max post-tax. – GendoIkari May 26 '20 at 19:34
  • right... I was thinking some people can contribute that much (or the max) even for post-tax. If they don't they just spend it all anyway. – nonopolarity May 26 '20 at 21:50
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Just for an example, say you're in the 20% tax bracket now. Contribute 60K to a traditional IRA, and after 30 years at 4% interest, it grows to 198K. If you contribute to a Roth, then that 60K becomes 48K after taxes, and after 30 years you only have 149K.

Of course you can use a financial or spreadsheet, and run endless scenarios, plugging in whatever values you think might apply to you. Perhaps your disposable income is high enough that you can easily afford the extra $12K in tax, or perhaps you can only afford to put money in a retirement account because it is pre-tax.

jamesqf
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    How does one contribute $60K to an IRA? The annual limits are about a tenth of that. – Dilip Sarwate May 26 '20 at 15:43
  • @DilipSarwate Contribute over multiple years... – Brady Gilg May 26 '20 at 20:33
  • you can contribute 401(k) and IRA combined for as much as $70k per year if over 50... about $7000 less if under 50 – nonopolarity May 26 '20 at 21:52
  • my assumption is not to contribute $48k after-tax. My assumption is contribute $60k even after-tax. – nonopolarity May 26 '20 at 21:53
  • @Dilip Sarwate: Bribe your Congresscritters so they write an exception to the law for you? Seems like this is an irrelevant nitpick to an answer that is simply trying to explain the math. – jamesqf May 27 '20 at 16:01
  • @nonopolarity: You're completely missing the point, which is that it costs you say $12K in taxes (depending on your bracket &c) NOW to contribute that $60K to a Roth. You could instead invest that $12K and enjoy 30 years of growth. – jamesqf May 27 '20 at 16:04
  • @jamesqf You're completely missing the point. Some people can put in $60k pre-tax into the pre-tax account, or put in $60k after-tax into the after-tax account. Whether they need to pay $12k in tax, it is another matter and not related to their concern. Their concern is whether the $60k in their account is pre-tax or after-tax. – nonopolarity May 28 '20 at 22:50
  • @nonopolarity: Perhaps you could explain why anyone (except perhaps an anarcho-capitalist with philosophical objections to paying taxes) would care, except as it affects their bottom line? – jamesqf May 29 '20 at 20:33
  • @jamesqf a lot of people hope they have a lot of money when they retire. A lot of people also hope they pay less tax. Then perhaps your question is "can you explain why these people exist in the world"? – nonopolarity May 29 '20 at 22:22
  • @nonopolarity: Perhaps you could explain why people (other than those few with philosophical objections) would object to paying more tax if it means they wind up with more money in their pocket? – jamesqf May 31 '20 at 03:16