Retirement Planning

Understanding the Difference Between Pre-tax and After-tax

Do the terms 'pre-tax' and 'after-tax' savings confuse you? You're not alone. That's why we've put together this overview to help explain the difference.

When it comes to saving for retirement, you have many different choices in retirement savings accounts. And to give you even more to think about, most retirement accounts come with their own rules and tax benefits.

While this article isn't meant to be a comprehensive guide into each type of retirement savings account, it may help you have a better understanding of the key differences between pre-tax and after-tax accounts.

Pre-tax retirement savings accounts

Also known as tax-deferred accounts, pre-tax retirement accounts generally include traditional individual retirement accounts (IRAs) and 401ks. The term pre-tax means that you can put off paying taxes on the money you contribute to these types of accounts, including any potential earnings they may generate. When you're ready to retire and begin to make withdrawals from a pre-tax retirement savings account (referred to as distributions), you will pay taxes on this money as it is considered taxable income.

A key benefit of a pre-tax retirement savings account is the potential to reduce your taxable income today, and not pay taxes until you withdraw your money.

After-tax retirement savings accounts

A good example of an after-tax retirement savings account would be a Roth IRA. For example, during the accumulation phase (the time when you are building up your retirement savings) any contributions that you make to your Roth IRA are made with after-tax dollars. In other words, you'll have already paid taxes on those contributions. Therefore, when retirement rolls around, qualified distributions will be tax-free (in accordance with IRS guidelines).1

One of the perks of receiving after-tax benefits is being able to lock into a certain tax rate to better hedge against the possibility of being in a higher personal tax rate when you retire. For example, if you have a pre-taxed 401(k) account and the tax rate in the future turns out to be higher, you may find yourself paying more taxes when you withdraw your money.

Check with your financial professional while saving for retirement

There are many different types of retirement plans, each with different rules about contributions, distributions, and taxation. When it comes to retirement planning, speak to your financial professional and/or tax professional who can identify pre-tax and after-tax retirement accounts, and help you design a strategy that's best for you.


1. http://www.irs.gov/publications/p590b/ch02.html#en_US_2014_publink1000231057
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Retirement Planning

Planning for retirement can feel complicated especially when it comes to the various types of retirement savings accounts and tax requirements. For this reason, it's good idea to learn some of the basics, including the key differences between pre-tax and after-tax accounts. For more information, visit the Protective learning center.


All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

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