Differences between 401k Pre-Tax Contributions & After-Tax Contributions
Pre-tax contribution is the amount of deductions you make from your monthly gross wage into your 401k retirement savings account, BEFORE taxes have been deducted. By making pre-tax contributions, you are lowering your current taxable income. For example, if you earn $10,000 per month, and contribute 10% of it towards a 401k retirement savings account, then your current taxable income is lowered to 90% x $10,000 = $9000. Instead of paying taxes on the $10,000, you will be paying taxes only on the $9000!
Another example is if you make $50,000 a year GROSS wage and contribute 10% of it into your 401k account, your current taxable income will be $50,000 - (10% x 50,000) = $45,000
On the other hand, after-tax contributions are the amount of deductions you make from your monthly income AFTER taxes have been paid. A scenario would be if you make $50,000 a year and pay $13000 in taxes, your net annual income would be $37,000. From this $37000 net income, you could make a contribution of $10,000 into a 401k plan. Your after-tax 401k contributions are therefore $10,000.
Here's a summary of the differences between pre-tax and after-tax 401k contributions in a tabular format: