401k pre-tax vs. post-tax

[Guest stevemurdock]

My firm offers the option of contributing to our 401k on either a pre-tax or post tax basis (they match 25% of the first 6% of contributions). I'm 24, and willing to take certain investment risks. I haven't found, however, postings relating to the advisability of investing pre-tax vs. post. It's my understanding that pre-tax offers an investment tax shelter; however, must I still pay tax yearly on investment income on this money, or is it deferred? Is a post-tax 401k investment like a Roth IRA in the sense that all income is deferred? I realize that this is a somewhat individualistic question, but does one option make more sense than the other?

Thanks.

[QDROphile]

Conventional wisdom is that you are better off with pre-tax savings under a qualified plan, especially if you save (outside of the plan) an amount equal to the taxes you would have paid if you saved after tax.

Various assumptions and considerations could justify the other choice. I am sure some clever person could post a reply that shows after tax savings in a qualified plan as sensible. For example, if the difference between ordinary income tax rates and capital gains rates become very large, certain scenarios would come out better for after tax savings, especially if your savings period were relatively short.

The investment earnings are tax deferred and ultimately taxable at distribution at ordinary rates for both pretax and after tax contributions.

[wmyer]

There are generally more tax advantages to contributing pre-tax as opposed to post-tax. Non-tax reasons to contribute post-tax however may include the following:

• Post-tax contributions can often be taken out as in-service distributions, while pre-tax contributions can't be;
  
• Post-tax contributions are good after you've already met the $10,500 (402(g)) limit for pre-tax contributions; and
  
• Some plans impose, say, a 15% limit on pre-tax deferrals, but let you contribute an additional amount on a post-tax basis.
  

When & if the "Roth 401(k)" comes into play in 2006, there may be some more things to add to this list.

[Guest Jeff V]

I would agree with W Myer.

I would add that income on a Roth IRA is not "tax-deferred like on a 401(k)", but is actually tax-FREE as long as you don't withdraw it early.