Q. My company allows both pre-tax and after-tax employee contributions to our 401k plan. Is the company’s 401k match identical for both plans?
My employer allows pretax and after-tax employee contributions to our 401(k) plan. Is the company’s match identical for both plans? I earn $100,000 and I want to contribute $6,000 at a 33.33% tax rate. My company matches $.50 for every $1.00 that I contribute. If I contribute $6,000 into the pretax plan, will my company match be the same as if I contributed the same amount into the after-tax plan? What is the best approach?
A. Typically, employer plans that offer both pre-tax (traditional) and post-tax (Roth) employee contributions also offer the same 401k match provision. Please note, though, that the company match is always a “pre-tax” balance (since you haven’t paid income tax on it yet). This means that if you decide to do post-tax (Roth) contributions, you’ll actually have two account balances. One will be post-tax (Roth) – the money you contributed. The other will be pre-tax – the company 401k match. When you later rollover your 401k balances, your post-tax contribution (and earnings) will roll to a Roth IRA, while the company’s pre-tax contribution (and earnings) will roll to a Traditional IRA. Of course, you can then convert the Traditional IRA to a Roth IRA (which will require you to claim the balance as income in the year of conversion).
If your marginal tax rate is 33% or higher, I’d recommend the pre-tax option as the tax savings are significant. Be sure to take into account any state taxes you may owe, too! If you find you’re in one of the lower brackets, I would recommend the Roth option instead. Make sure you know your actual marginal tax rate (Federal and state) before deciding!
John Madison is author of “The Steward Plan,” a Certified Public Accountant, and founder of Dayspring Financial Ministry. He earned a Master’s Degree in Personal Financial Planning (MSPFP), the MPAS (Master Planner Advanced Studies), CRPC (Chartered Retirement Planning Counselor) and AWMA (Accredited Wealth Management Advisor) designations. He has been featured in the New York Post, Forbes, Fox Business, Crosswalk, The Christian Post, Charisma Leader, Chicago Tribune, U.S. News and World Report, AARP.com, Bankrate.com, CNBC.com, among many other media outlets. For more information, visit http://www.dayspringfm.com.