Pre-Tax and Post-Tax Plan

 

With Social Security benefits providing support to an ever increasing number of retirees and senior people in the US, the funds are exhausting fast. A well thought-out personal savings plan as your alternative source of income can see you better through your retirement days. There are options like 401/403 plans, IRAs and annuities which you can consider as alternatives to Social Security.

Before you invest in any plan you need to consider carefully whether a Pre-tax plan or a post-tax savings is the best option for you. While we know that there is nothing called a no-risk-all-gain plan, but, you still can plan your benefits in advance so that you don’t have to compromise on your savings and earnings when you retire from work.

What is a pre-tax plan?

With a pre-tax plan, you can have the cost of your portion of the insurance cut off from your paycheck before taxes. Your taxable income gets reduced and naturally, you also enjoy a slashed down rate on the taxes you owe. A corporate 401(k) plan is an easy way to save money on a pretax basis. Your contribution reduces your taxable income and this in turn reduces your taxes.

Why is a pre-tax savings plan better than a regular bank savings account?

Actually, you save money on a pre-tax basis. Plus, the earnings on your savings are tax-deferred. Because of compound interest, the tax benefits will help you save more money during your working years. The money you put in and the interest you earn, are not taxed until you withdraw. This way, you can save more than in an after-tax savings plan where you also have to pay taxes every year on any earning. An employer match is another reason why you could opt for a pre-tax plan.

What is an employer match?

If a plan has an employer match, it means that your employer contributes in your individual account up to a certain limit which is usually based on how much you put in. This is a great way to increase your retirement savings.

What can you gain from a post-tax ?

If you want to opt for deductions after taxes, you can drop your insurance coverage in one of the insurance plans you have. But that way, you will have to wait for the next open enrollment period to regain eligibility to enter the plan again. Or, you might have to wait you have a change in status to become eligible again for the plan. For more information of pre-tax and post-tax plans, you can visit the relevant section in the PeopleRice website.