Q&A: “After-tax” dollars – What does it mean?
Question by yellowhummin217: “After-tax” dollars – What does it mean?
I’m reading about retirement plans and it’s talking about how some plans are paid with “after-tax dollars.” What exactly does this mean? (I know they’re taxed, but how, and why?)
Best answer:
Answer by v b
Tax in this case means the 1040 tax return. After-tax means I used the money after it was reported on the return. Pre-tax means the money never made it to the return.
I work all year. I make ,000. My W-2 shows ,000 and I pay taxes on that…these are after tax dollars. I can use them to fund my Roth IRA.
Alternately, I make ,000. I tell my employer to put 00 into a retirement plan. My W-2 shows ,000 and I pay taxes on ,000. These are pre-tax dollars.
Give your answer to this question below!
July 29th, 2010 at 10:02 pm
It means you had paid taxes on the money you put in. The opposite is pre-tax dollars – if for example you contribute to a 401K at work, you don’t pay tax on the amount you contribute, it’s subtracted from your gross income on your W-2 – so that’s paid with pre-tax dollars.
July 29th, 2010 at 10:24 pm
Some retirement plan contributions are not taxable in the year you set them back for retirement. A 401-k contribution is a good example of a “pretax contribution”. Your taxable income is reduced by the amount of contribution, and you eventually pay tax on that amount when you withdraw it in retirement.
An example of an “after-tax dollars” contribution is a Roth IRA. It does not reduce your taxable income when you make the contribution. However, you never have to pay any tax on the amount saved OR all the income earned from it. A general rule of thumb is to save as much as allowed “pretax” before moving into “after-tax” plans.
Good luck.
July 29th, 2010 at 10:37 pm
Income that has already been taxed. For example, many companies make health insurance available to employees abd even pay for a portion of it. However, your portion is usually paid with “before tax” dollars, meaning that the insurance premium was paid for with wages before taxes were calculated. That way you get to pay with money before it is taxed, you don’t have to pay the tax and then pay the premium. If you did that, it would be with after tax dollars.
Hope this helps, have a great night.