401k vs 401a Newbie Question

[Guest clem]

First time here and can't seem to find an answer to my question in the archives, so hoping for a little help. My husband is starting a new job tomorrow. We are right now trying to fill out the paperwork on the 401 plans the company is offering. Based on years of service, they are offering to match up to 8% on either a 401k or 401a. From what I am reading, the 401k is pre-tax and the 401a is after-tax. We have never had this opportunity and clueless as to which is best and looking for some direction. Thanks to anyone who might be able to offer us some help.

[Tom Poje]

no one can predict the future.

the most common argument I have seen for choosing a Roth 401(k) (what you call 401a) would be if you expect to be in a higher income tax bracket at retirement, then the Roth is better. or also, from the calculators I have seen, if you are under age 50, most would seem to say the Roth is better simply because the money has a chance to grow, so the tax savings are a lot better - and it doesn't really matter what tax bracket you end up in.

I have seen arguments on the 401k side that say that is a better deal. But from what I have seen from these this would only be true if you also invested the $ that weren't taxed.

e.g. take $1000.

in a 401k you defer 850 and get a tax break of 150. A Roth would cost 1000 because you have to pay taxes up front.

Now, if you take that 150 and also invest it somewhere else then the 401k turns out to be a better deal.

but I am sure others can explain all that stuff better than I can -again, I have heard arguments from both sides.

[R. Butler]

Another consideration for choosing pre-tax over Roth might be tax credits. Obviously the Roth results in higher Adjusted Gross Income than Pre-Tax. Depending on an person's financial situation choosing the Roth may bump someone out of certain tax credits.

[masteff]

Whoa! Need to verify if it's a Roth or just a regular "thrift" plan (plain vanilla after-tax, which has been around for many years and in older companies is sometimes referred to as either a 401(a) or "thrift" plan).

401(a) refers to the IRS code section that specifies requirements for a qualified trust. A 401(k) plan is contained w/in a 401(a) trust.

First question for your husband's company is whether the 401(a) is referring to regular after-tax or Roth.

Second question is what are the withdrawal restrictions... generally, regular after-tax has no restrictions on when it can be withdrawn. So if it's regular after-tax, that's a consideration. Some people will put in part pre-tax and part after-tax, so they get the tax-deferred earnings but can w/draw the after-tax money if they need it for an emergency. It all depends on your personal finances and how much other savings you might have available.

Using the standard assumptions, you're better off putting money in pre-tax (versus regular after-tax). This is based on theory that you're in a higher overall tax bracket now than you will be during retirement when you withdraw the funds. But if they offer a Roth option, then read the comments from the posters above for additional insights on Roths.