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Chapter 6. Saving Pre-Tax or After-Tax—D... > Deciding What to Do - Pg. 71

Saving Pre-Tax or After-Tax--Does It Really Matter? 71 Deciding What to Do When considering whether to contribute pre-tax or after-tax, remember your goals. Why are you saving? How much do you need to save to reach each of your financial goals? If your goal is retirement, then you should take advantage of the compounding on your tax sav- ings in addition to the compounding on your contributions and the earnings on your investments. All three work together to build wealth over time. Choosing to contribute after-tax instead of pre-tax leaves money on the table. If you're saving for the kids' education and you'll need the money in a few years, contributing after- tax might make sense. This way you won't have to pay the money back as you would if you had taken a 401(k) loan. The important point to remember is you'll never know how much to save to reach a goal until you calculate it. If you need to save 15 percent for retirement, which is long-term, then pre-tax is the way to go. If you need to save another 3 percent for the kids' education or a new car, then after-tax could be a good decision. Using your 401(k) to save for your other financial goals is smart business. But you should never take money out of your 401(k) for any reasons other than those for which you put it in. If you're saving for retirement, you shouldn't withdraw the money or borrow the money for any other reason. Doing so will--at best--delay your goal, and at worst force you to miss your goal entirely. Try thinking about after-tax contributions this way: when you make an after-tax contribution, you do so because you want access to your money. It's an insurance policy to protect you in case you need the money. In a very real sense you are paying Uncle Sam for this insurance. Your cost for this coverage is equal to the taxes you paid. Only you can decide if this cost is worth it. If you must have access to your money and you decide after-tax is the way to go, try a Roth IRA. It's more flexible