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Pre-tax v After Tax Retirement Savings

Well here it is  New Year! Where does the time go?

In a previous post I intimated that pre-tax 401k contributions may not be the best way to save for retirement. With the very real possibility that taxes will have increased significantly by the time those saving for retirement now begin to access those pre-tax funds they could end up paying more in taxes on the funds later than if they paid taxes on them now.

When the 401k first became popular in the 1980s the top marginal tax rate was around 70% compared to 40% today. Those that are accessing their 401ks now are paying a lower tax rate now than they would have paid at the time they were contributing to the plan. Now take today’s worker. They are contributing at today’s lower tax rates and not paying taxes on the funds when most agree that taxes are going up in the future. How much sense does it make to save the taxes now when you would pay 15-40% depending on your tax bracket, when you can build your retirement fund with after tax dollars now and avoid paying higher taxes on the funds when you retire? Experts agree there is a very real possibility that when those contributing now are 59 ½ or older and begin to access the funds they have not paid taxes on they will pay a higher tax rate on the withdrawals.

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