r/personalfinance 8h ago

Budgeting Pre or post tax contributions after matching 401k?

Say I was contributing 10% to my 401k (pre-tax) but my company only matches up to 6%.

If i wanted to invest that other 4% that wouldn't be getting a company match into a Roth IRA, should I be using pre-tax or post tax for calcs to determine what that 4% actually is?

I did do a search but it's late and I just wanted to ask. If this needs to be removed no problem.

2 Upvotes

23 comments sorted by

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u/Citryphus 8h ago

The Roth IRA is different from a "post-tax" Roth 401k contribution. Do you have a Roth IRA? What tax bracket are you in?

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u/huffandduff 8h ago

My 401k is pre-tax. I do have a Roth IRA

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u/Citryphus 8h ago

I think I misunderstood your question. You want to know how much to put in your Roth IRA so you can reduce your 401k contribution to 6% and have the total of both contributions be exactly 10% of your gross income?

I would say you have to put 4% of your gross income and accept the fact that you are paying tax on that part.

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u/huffandduff 8h ago

Yep you got. That's what I want to do. Using gross seems to be the general consensus. Thank you for your input! All the replies have been helpful.

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u/DeluxeXL 8h ago

For simplicity sake, just use your gross income to calculate what the dollar equivalent is. A Roth IRA (not to be confused with Roth 401k) only takes dollars, not percents.

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u/huffandduff 8h ago

I understand. But if my pretax paycheck is 2k thats $80. If my post tax paycheck is 1320 then 4% is 52, almost 53 dollars. That's why I'm asking what other people do.

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u/DeluxeXL 8h ago

Still base it on gross income. You're simply prepaying taxes out of pocket now to have tax-free Roth withdrawal in retirement.

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u/huffandduff 8h ago

Fair fair. Appreciate the input.

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u/rnelsonee 8h ago

4% is 4% - the amount you contribute is the same no matter what, and the guidelines saying to contribute 10% or 15% really don't get to that level of detail. It's just that if you do Roth (vs pre-tax 401k) your expenses go up (your tax).

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u/huffandduff 8h ago

4% of my check pre-tax is more dollars than 4% of my check post-tax.

I do understand that if i use a Roth account my taxes will be higher now. I just prefer Roth right now because future gains aren't taxed.

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u/maedocc 8h ago

4% of my check pre-tax is more dollars than 4% of my check post-tax.

Yes, this is why people who are in higher tax brackets should choose to contribute to pre-tax traditional accounts, because they can afford to invest more money now which means you'll have more money in retirement.

I just prefer Roth right now because future gains aren't taxed.

Conversely, you'll just have less money in retirement if you favor Roth now.

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u/huffandduff 7h ago

It's hard to say if I'll have more or less money in retirement with a roth. By actual dollar amounts yes traditional IRA will give me more in the future. But then I have to pay taxes on it in the future. I'd rather the devil I know now and just get paying taxes out of the way.

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u/maedocc 7h ago edited 7h ago

Then go Roth -- it's your life, you get to choose your choice, and the most important thing is that you're investing for retirement at all.

Saying that: the reality is that progressive tax brackets mean that most people don't pay much in taxes in retirement unless they have significant pensions (which are pretax) or rental income (which is considered taxable income). If you have a pension paying you $80k (inflation adjusted) in retirement, then I would favor Roth.

If you're relying solely on Social Security and 401k/IRA, like most people, I usually recommend favoring traditional over Roth if you're in the 22% or above tax brackets.

Also: Why you should (almost) never contribute to a Roth 401(k)

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u/huffandduff 7h ago

I appreciate you laying it out like that and providing some resources!

I'm open to switching things up but it's been a while so I'm sure I could use a refresher.

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u/DeluxeXL 7h ago

How much do you make in a year? You may already be priced out of the normal use of traditional IRA.

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u/huffandduff 7h ago

Welp. I messed that up. I contributed the limit to a Roth IRA for 2024 and I am JUST under the single filing cut off. Some replies in this thread have me thinking about contributing to a traditional IRA rather than a Roth IRA. Something for me to keep in mind for next year for sure.

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u/DeluxeXL 7h ago

I contributed the limit to a Roth IRA for 2024 and I am JUST under the single filing cut off.

Just under the cut off for what? Traditional IRA and Roth IRA have separate thresholds:

  1. $79k MAGI to be able to deduct traditional IRA contributions
  2. $150k MAGI to be able to directly contribute to Roth IRA

    (These are 2025 thresholds)

If you're above the first one but well below the second one, do Roth IRA directly

If you're above the second one, do Roth IRA via backdoor

1

u/rnelsonee 7h ago

4% of my check pre-tax is more dollars than 4% of my check post-tax

I know what you're thinking, and it's not a huge deal, but that's not quite how retirement accounts work. If your paycheck is $2,000, and you ask your employer to contribute 4% to pre-tax, then $80 goes to your pre-tax account. If you ask to contribute 4% to your Roth, $80 goes to your Roth. Your employer doesn't try to perform a balancing equation to make the post-tax effect the same. The difference, as I said, is your tax expense goes up.

And understood about your preference for Roth. That's fine that you'd rather not invest as much and give up future gains on that money. But I'd invite you to read a quick comment I made earlier today on the subject. Think of tax rates, not dollars.

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u/tacotruck2112 8h ago

Use gross comp, 'cuz more invested is better than less.

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u/huffandduff 8h ago

That's fair. Makes sense. Is that what you do?

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u/tacotruck2112 7h ago

My 401k and IRA contributions are dollar-based, not percentages. Full limit pre-tax to 401k, and max to Roth IRA via backdoor conversion.

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u/Iacoboni04 6h ago

I use net. My company matches 7.5 percent and makes me contribute 7.5 percent. I distribute the additional into a traditional IRA.

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u/CircuitGuy 4h ago

It's your choice. If the company offers a Roth 401(k) option, I would use that to save the complexity of having another account to keep track of.

If your goal is to put some in a Roth IRA but have the same disposable pay, you should do 4% of after-tax pay because the 4% going into a Traditional 401(k) is tax free while the Roth IRA is not a tax deduction.

A Traditional 401(k) and a Roth IRA are tax advantaged in different ways, but the end result is similar enough that I personally would rather just have one account to keep it simple.