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Get a tax advantageYour plan allows you to make pre-tax contributions, Roth 457(b) after-tax contributions, or a combination of the two. If you are age 50 or older, or will turn 50 by year's end, and you contribute the maximum allowed, you can also make catch-up contributions. Catch-up contributions allow you to save above the normal IRS annual limit on a pre-tax or Roth basis. When you make Roth contributions, you won't pay income tax when you make withdrawals, provided you have turned age 59½, left the employer, and made your first Roth contribution at least five years prior. If you don't meet those conditions your withdrawals may be subject to income tax. When you make pre-tax contributions, you’ll get an immediate tax break. That’s because your savings are deducted from your paycheck before taxes are taken out, so your taxable income is reduced. Let’s say you earn $30,000 a year and contribute 10% to the plan, pre-tax. You won’t have to pay taxes on your $3,000 plan contribution. So if you’re in the 15% tax bracket, you’ll pay $450 less in taxes.
Pre-tax or Roth? Roth contributions may make sense if …
Pre-tax contributions may make sense if …
Tax implications: You will be responsible for paying any federal, state, local, or foreign taxes on a distribution or withdrawal from pre-tax accounts. A distribution or withdrawal of Roth 457(b) earnings is usually also taxable unless the initial Roth contribution was made more than five years ago, you have left the employer. To the extent required by law, Vanguard will make the appropriate withholding for tax purposes. All investing is subject to risk, including the possible loss of the money you invest. |
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