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After-tax retirement savings

Question: The company I work for offers a 401k, both normal pre-tax contributions and after-tax contributions, and also a Roth-401K. Can you please explain the differences between the Roth-401K and the post-tax contributions to the normal 401k? Erik, Tulsa, OK

Answer: Yes, in both instances you're making after-tax contributions. There are a number of differences between the two options, but I want to highlight the critical one that becomes apparent in retirement.

When you take the money out of the Roth-401(k), assuming you are at least 59 ½ and have owned the account for 5 years or more, the investment gains are free of Uncle Sam clutches. The same isn't true for withdrawals from the after-tax account in a traditional 401(k). There isn't any tax levy on the amounts you contributed, of course. But you will pay ordinary income taxes on any investment earnings or gains at withdrawal.

By the way, in most cases it makes more sense for savers to open up a Roth-IRA on their own rather than put extra retirement money into an 401(k) after-tax account, assuming your employer offer the option. The reason is the value of withdrawing money free of taxes in old age with the Roth.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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