Boeing 401(k) Contributions: Pre-Tax, After-Tax, or Roth?
As a Boeing employee, you can make contributions to your retirement fund on a pre-tax, after-tax, or Roth basis. Each option has its own benefits and tax implications. But which is right for you?
Let’s take a look at the options.
Key Takeaways
Boeing's 401(k) plan offers pre-tax, after-tax, and Roth contribution options, allowing for personalized tax strategies.
Pre-tax contributions reduce your taxable income now, allowing for tax-deferred growth until retirement, but withdrawals are taxed as ordinary income.
After-tax contributions do not provide an immediate tax benefit but allow you to contribute beyond the standard limits, and earnings are taxed upon withdrawal unless rolled over to a Roth IRA.
Roth contributions are made with after-tax dollars, offering tax-free growth and withdrawals in retirement, and starting in 2024, Roth 401(k) accounts will no longer require RMDs.
Strategically combining different types of contributions can help optimize your tax benefits both now and in retirement.
Contributing to the Boeing VIP
The Boeing Voluntary Investment Plan (VIP) is a 401(k) program that Boeing employees can use to save for retirement. The plan has several benefits, including:
Matching contributions: Every time you contribute to your Boeing VIP, the company will match your contribution dollar-for-dollar, up to 10% of your salary. That means you can double your retirement savings for free!
Immediate vesting: Boeing offers immediate vesting for all your VIP funds, including matching contributions. You own the full balance of your 401(k) account right away, regardless of how long you stay with the company.
Investment options: The Boeing VIP provides a variety of investment options, including lifecycle funds, index funds, and actively managed funds.
Contribution options: When investing money in your VIP, you can opt for pre-tax, after-tax, or Roth contributions. This allows you to customize your contribution plan for a better tax strategy!
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Pre-Tax vs. After-Tax vs. Roth Contributions: A Closer Look
Pre-Tax Contributions
Pre-tax contributions are made with money that hasn't been taxed yet. This means that your taxable income for the year is reduced by the amount you contribute, lowering your current tax bill. The contributions and any earnings grow tax-deferred until you withdraw them in retirement.
Tax Benefits and Implications
Immediate tax relief: Contributions reduce your taxable income for the year, which can lower your tax bill and provide more take-home pay.
Tax-deferred growth: Investments grow tax-deferred, meaning you won't pay taxes on the contributions or earnings until you withdraw the money in retirement. This allows your savings to compound more efficiently over time.
Taxation at withdrawal: Withdrawals are taxed as ordinary income based on your tax bracket at retirement. If you expect to be in a lower tax bracket during retirement than you are now, this would allow you to keep more of your retirement savings for yourself.
Pre-Tax 401(k) Contribution Limits
For 2024, you can contribute up to $23,000 in pre-tax funds to your 401(k). If you are 50 or older, you can make additional catch-up contributions up to $7,500, bringing the total limit to $30,500.
Pre-Tax Distribution Rules
Required minimum distributions (RMDs): You must start taking RMDs from your pre-tax 401(k) starting at age 73, as per the new regulations. RMDs are mandatory withdrawals based on your life expectancy and account balance (Investopedia).
Early withdrawals: If you withdraw funds before age 59½, the earnings may be subject to a 10% early withdrawal penalty in addition to ordinary income taxes, unless you qualify for an exception. (The contributions themselves can be withdrawn tax-free.)
When Are Pre-Tax Contributions a Good Idea?
Pre-tax contributions are ideal if any of the following are true:
You expect to be in a lower tax bracket during retirement than you are now.
You want to reduce your taxable income now, which can be helpful if you currently have other financial goals or expenses.
You prefer immediate tax savings over tax-free withdrawals in retirement.
Pre-Tax Example Scenario
Let’s say John is a Boeing employee in his early 40s, earning $100,000 annually. By contributing $10,000 to his pre-tax 401(k), John reduces his taxable income to $90,000, saving him approximately $2,200 in federal taxes (assuming a 22% tax bracket). This not only lowers his current tax bill but also allows his $10,000 contribution to grow tax-deferred until retirement. That’s a good deal!
After-Tax Contributions
After-tax contributions are made with money that has already been taxed. This means that there is no immediate tax benefit when you contribute, but these contributions can grow tax-deferred, similar to pre-tax contributions.
Tax Implications and Benefits
No immediate tax benefit: Contributions do not reduce your current taxable income.
Tax-deferred growth: While your contributions will not be taxed again, the earnings on these contributions will grow tax-deferred. You will pay taxes on the investment gains when you withdraw the money.
Flexibility in contributions: After-tax contributions allow you to save more than the traditional pre-tax and Roth contribution limits. This can be especially beneficial for high-income earners who want to maximize their retirement savings.
Contribution Limits
For 2024, the combined limit for all employee and employer contributions to your 401(k) is $69,000. (Or $76,500 if you are age 50 or older and eligible for catch-up contributions). This includes pre-tax, after-tax, and Roth contributions. After-tax contributions can help you reach this higher limit.
Distribution Rules
Qualified distributions: When you withdraw funds, the contributions are tax-free since you have already paid taxes on them. However, any earnings will be taxed as ordinary income.
Rollover options: You can roll over after-tax contributions to a Roth IRA, allowing for tax-free growth and withdrawals of both contributions and earnings in the future.
Early withdrawals: Similar to pre-tax contributions, if you withdraw the earnings before age 59½, you may be subject to taxes and penalties on the gains unless you qualify for an exception.
PRO TIP: After-tax contributions can be rolled over into a Roth IRA, allowing you to benefit from tax-free growth and withdrawals in the future. The Boeing Mega Backdoor Roth program is a great way to do this!
When Are After-Tax Contributions a Good Idea?
After-tax contributions can be beneficial if:
You’ve already maxed out your pre-tax and Roth contributions but still want to save more in a tax-advantaged account.
You anticipate being in a similar or higher tax bracket in retirement, and you want to maximize your savings potential.
You want the flexibility to convert these contributions to a Roth IRA for future tax-free growth and withdrawals.
Example Scenario
Sarah, a high-income Boeing employee, has already contributed the maximum allowable pre-tax and Roth amounts to her 401(k). She decides to make additional after-tax contributions to further boost her retirement savings. By rolling these after-tax contributions into a Roth IRA, Sarah ensures that her investments can grow tax-free, and she can withdraw them tax-free in retirement.
Roth Contributions
Roth contributions are also made with after-tax dollars. This means you pay taxes on the money before it goes into your 401(k), but the contributions and any earnings can be withdrawn tax-free in retirement, provided certain conditions are met.
Tax Benefits and Implications
Tax-free withdrawals: Contributions and earnings can be withdrawn tax-free if certain conditions are met, such as the account being open for at least five years and the account holder being at least 59½ years old.
No RMDs: Starting in 2024, Roth 401(k) accounts will no longer be subject to RMDs due to changes in the SECURE Act 2.0. This will allow your savings to grow tax-free for a longer period.
Benefit for high earners: There are no income limits on making Roth contributions within employer plans, making it an attractive option for high-income earners who may not be eligible for a Roth IRA.
Contribution Limits
The contribution limit for Roth 401(k) is the same as pre-tax 401(k) contributions. In 2024, that’s $23,000 if you are under 50 years old, and $30,500 through catch-up contributions if you are 50 or older.
Distribution Rules
Qualified distributions: To qualify for tax-free withdrawals, the Roth account must be at least five years old, and you must be at least 59½ years old, disabled, or deceased. If these conditions are not met, earnings may be subject to taxes and penalties (Investopedia) (TIAA).
Early withdrawals: You can withdraw your Roth contributions at any time without taxes or penalties since taxes have already been paid. However, withdrawing earnings before meeting the qualified distribution criteria may incur taxes and penalties.
PRO TIP: Roth contributions are particularly advantageous if you expect your income and tax rate to increase over time. Paying taxes now at a lower rate allows for tax-free growth and withdrawals later.
When Are Roth Contributions a Good Idea?
Roth contributions are ideal if:
You expect to be in a higher tax bracket during retirement, making tax-free withdrawals more valuable.
You prefer to pay taxes now and enjoy tax-free income in retirement.
You want to avoid required minimum distributions, allowing your savings to grow tax-free for a longer period.
Example Scenario
Emily, a Boeing employee in her 30s, expects her income to increase significantly over her career. By making Roth contributions now, Emily pays taxes at her current lower rate and can withdraw her savings tax-free in retirement, potentially saving her thousands in taxes as her income and tax rate rise.
Pre-Tax vs. After-Tax Vs. Roth: Comparing the Three Options
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How to Make the Right Choice for You
Choosing the right contribution type depends on your personal financial situation and future expectations. Here are some key factors to consider and steps to help you make an informed decision.
1. Evaluate Your Current Tax Situation
Start by looking at your current income and tax bracket. If you are in a high tax bracket now, pre-tax contributions might provide significant immediate tax savings. Conversely, if you are in a lower tax bracket, Roth contributions could be more beneficial as you pay taxes at a lower rate now.
Then, consider whether you expect to be in a higher or lower tax bracket during retirement. If you anticipate being in a lower bracket, pre-tax contributions may be advantageous. If you expect to be in a higher bracket, Roth contributions could provide more benefits through tax-free withdrawals.
2. Assess Your Retirement Goals and Timeline
When and how are you hoping to retire? This will help you make your choice. For example, Roth contributions allow for tax-free growth, which can be particularly beneficial if you have a long investment horizon. Roth accounts also offer more flexibility with no required minimum distributions (RMDs), making them ideal if you want to leave your savings to grow tax-free for as long as possible.
3. Consider Your Employer Match
Ensure you are contributing enough to take full advantage of any employer match. This is essentially “free money” that can significantly boost your retirement savings. Keep in mind that employer contributions are typically made on a pre-tax basis, even if your own contributions are Roth. This means that employer match funds will be subject to taxes upon withdrawal.
4. Factor in Contribution Limits and Saving Capacity
Be aware of the annual contribution limits for each type of contribution. If you have the capacity to save more, after-tax contributions might allow you to exceed the standard limits and maximize your retirement savings.
If you have the financial flexibility, consider a combination of pre-tax, after-tax, and Roth contributions to balance tax benefits now and in the future. You don’t have to pick just one!
PRO TIP: Diversify your contributions at least between pre-tax and Roth to hedge against future tax rate uncertainties.
5. Consult a Financial Advisor
A financial advisor can provide tailored recommendations based on your specific financial situation, retirement goals, and tax considerations. They can also help you navigate complex rules and optimize your savings strategy.
Working with a financial advisor isn’t a one-and-done thing, either. Your advisor should stick by you and help you stay on track and make necessary adjustments as your financial situation and goals evolve over time.
Not Sure Which Is Best for You? Get Help from TrueWealth!
Understanding the differences between pre-tax, after-tax, and Roth contributions can help you maximize your retirement savings. However, retirement planning is nothing if not complicated. For the best results, it’s always best to get some help from the pros.
At TrueWealth Financial Partners, we specialize in helping Boeing employees get the support they need to retire in style. We’ll take the time to get to know your unique needs and goals. Then, we’ll create a personalized plan tailored just for you!
Want to learn more? Let’s talk! Schedule a free consultation today, and we’ll be happy to help you in any way we can.
FAQs
Can I contribute to both pre-tax and Roth accounts?
Yes, you can split your contributions between pre-tax and Roth accounts to diversify your tax strategy. This approach allows you to benefit from both immediate tax savings and tax-free withdrawals in retirement.
How can I change my contribution type?
You can adjust your contribution type through your Boeing 401(k) account settings or by contacting your plan administrator. It’s important to regularly review and adjust your contributions based on your financial goals and tax situation.
Should I consult a financial advisor before making changes to my contributions?
Yes, consulting a financial advisor can help you make informed decisions based on your individual financial situation and retirement goals. A financial advisor can provide personalized advice and help you create a strategy that maximizes your retirement savings.
What are the benefits of rolling over after-tax contributions to a Roth IRA?
Rolling over after-tax contributions to a Roth IRA allows your investments to grow tax-free, and withdrawals of both contributions and earnings are tax-free in retirement, provided certain conditions are met. This can be a highly effective strategy for maximizing your retirement savings.
What is the difference between Roth 401(k) and Roth IRA contribution limits?
For 2024, the contribution limit for a Roth 401(k) is $23,000, with an additional $7,500 catch-up contribution for those aged 50 and older, making the total $30,500.
Roth IRA contributions, however, are limited to $7,000, with a $1,000 catch-up contribution for those aged 50 and older, making the total $8,000.
Are employer matching contributions taxed differently than my contributions?
Employer matching contributions are typically made on a pre-tax basis, meaning they will be taxed as ordinary income upon withdrawal. It’s important to factor in these contributions when planning your tax strategy for retirement.
What are the new RMD rules for Roth 401(k)s starting in 2024?
Beginning in 2024, the requirement for Roth 401(k)s to take required minimum distributions (RMDs) will be eliminated due to changes in the SECURE Act 2.0. This change allows your Roth 401(k) assets to continue growing tax-free without the need to take mandatory withdrawals during your lifetime.
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