Pre-tax or After-tax?
By: David Smyth, September 23, 2020
When it comes to your employee benefits, the major one of course is some type of work-sponsored retirement plan, and by now all of you know (I hope!) that you need to contribute at minimum what it takes to earn the full company match. That is literally free money you're being given. Don't turn it down.
I'm also aware that there's a significant number of you who work for a company that doesn't provide you with a match because they offer a pension or other type of compensation. There are even more who were putting in enough for the full company match, but now, due to the uncertainty of this year, the company has reduced or eliminated that match. The question I get from these folks is, "Should I keep contributing even though I'm not getting a match?"
My first thought is that yes, it's generally a good idea to continue to contribute to your work retirement plan as much as you can - those dollars are being saved to eventually be spent during your retirement. If your employer provides any type of match, well, that's just more gravy on the biscuit. The most important question here isn't whether you should contribute. It's really about what your options are in making those contributions. Does your employer only offer a pre-tax option, or is there an after-tax option as well?
In the last decade many employers have amended their plans to include both pre-tax and post-tax options. With pre-tax, a little less goes to Uncle Sam now but you'll pay taxes later. With post-tax, a little more goes to Uncle Sam with each paycheck, but you won't pay taxes later. So, if you have both available, should you consider funding both options? Yes, you should. The amount for each bucket is an individual calculation based on your household income, your age, and your timeline for retirement. Our team is happy to sit down with you and create a plan customized for you.
When you receive your new benefits package and funding options for 2021, please, give us a call so we can answer any questions you have about the best options for you.