Step By Step: Investing in Pre-Tax 401(k) or Roth 401(k)

Pre-Tax 401(k) or Roth 401(k).

Thanks for visiting the Financial Investor, I run the Financial Investor YouTube Channel.

401(k) The Playlist Here.

Video Below!


It is important to begin Investing, but prior to investing always do the following;

#1 Pay Off High-Interest Debt First (Anything Over 5%) School Loans, Credit Cards, Etc. 

#2 Create Your Rainy Day Fund at least 3-6 Months of living expenses. This will cover the essentials (Shelter, Food/Water, Utilities).



Choosing The Pre-Tax 401(k) or Roth 401(k)

We already cover the differences between both of these Here,




Step 1: Read your Capital Accumulation Plan / Summary Plan Description:

Read Everything!  One of the key areas new 401(k) investors miss is the Vesting Schedule.  This period is normally 3-7 Years this is important if your company does Profit Sharing or Matching Contributions.  Vesting schedule means you will not be entitled all of the contributions until you have been employed with the Employer for a specified period of time.


Step 2: Decide between 401(k) & Roth 401(k):

Pre-Tax 401(k) Defferal:  Taxable income contributes to 401(k), you can deduct contributed amount. This can cause you to fall into a lower tax bracket, but down the road you will need to pay taxes on all contributed funds, interest, dividends and withdrawals.

Roth 401(k) Deferral: Taxable Income contributes to Roth 401(k), you pay taxes on it THAT YEAR.  At 59 1/2 you can withdrawal TAX-FREE since you funded your account and paid taxes on it already.  You can withdraw your contributions at anytime without penalty, but 10% penalty if you withdraw earnings prior to 59 1/2.  After 59 1/2 all interest, dividends can be withdrawn TAX FREE.

I love the idea of a Tax-Free Retirement with a Roth 401(k),  The beauty of the Roth IRA is that all account growth—whether from interest, dividends or distributions—is 100 % tax free.  I don’t plan on staying in my current tax bracket I want to go Up, Up, Up!  Who knows if “Universal Health Care” becomes a thing where we pay 50% to federal income tax, so I will opt to choose a Roth 401(k).


Step 3: Determine if your employer will match contributions:

Check the Plan and see if your employer matches, somewhere between 2-5% is average so make sure you invest at least enough in the plan to get the entire company match. Otherwise, you’d literally be throwing away money.

My company does offer an employee match! So I will be participating!


Step 4: Figure out exactly how much you want to invest:

Determining exactly how much to contribute to your 401(k) is probably the most difficult step in this entire process, I suggest always matching.  Always know your limit on what you can handle, don’t over invest where you’ll need to pull money out, but at the same time it’s your FUTURE use the calculator below to see how much you need to save over how many years.

I have Roth IRA, Thrift Savings Plan & Non-Retirement Account, so in this case I will opt to do the employee match.  Anything extra I will invest inside my Roth IRA where I have a bigger range of investment options.


Step 5: Choosing Your Investments:

Always log onto your Benefit website and opt to customize your selection, by default you may be put in a higher fee mutual fund.

You will normally have a selection ranging from, Guaranteed Accounts, Money Market, Target Date Funds, Asset Allocation Funds, Bonds, Large-Cap Stocks, Mid/Small Cap Stocks, International Stocks.



Step 6: Implement Your Screening Process:

I want to get a good deal when purchasing a Mutual Fund or ETF inside my Roth 401(k), so I will be looking at the following.

  • Annual Operating Expenses? – What it cost the investment company to operate over the course of a year.
  • Expense Ratio – Annual fee based on value of its assets over the year, while small it can impact over time.
  • How long has it been around? I want a fund with some history and gone through a downtime.
  • 5/10-Year Avg – Keep Up With S&P 500 7-10% + Dividend Yield.
  • What % of Bonds, Stocks, Etc does it hold?

Average Mutual Fund expense ratio are .74% in 2016, which means for every $1,000 it would cost you $7.40 in annual fees.

Average ETF expense ratio are .24% in 2016, which means for every $1,000 it would cost you $4.40 in annual fees.




Consider The Following Example:

Consider an example of a 30-year-old worker who earns $50,000 per year and plans to retire at 65. If the employer matches 5% of that person’s salary, check out the big difference additional contributions can make in his or her final retirement nest egg.

Employee contribution Employer contribution Total % of salary Potential value at age 65
5% of salary 5% 10% $750,439.42
6% 5% 11% $825,483.36
7% 5% 12% $900,527.30
8% 5% 13% $975,571.24


Enter Your Numbers:

Estimated Rate of Return Avg is 7%


I Hope You Enjoyed This Article.

If You Liked This Article, PLEASE SHARE with your friends on FACEBOOK & TWITTER.  

I want to know what’s on your mind and get ideas on how you are planning on investing in your future.


We Covered Pre-Tax 401(k) or Roth 401(k)!

If You Have Never Checked Out My YouTube Channel Financial Investor, Stop By & Visit!

financial investor

Follow Along As I  Track My Stock Market Journey, All While Providing Financial Information To Be Financially Set!

Thanks For Your support,
Financial Investor

Please Read Our Policy & Disclaimer.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Secured By miniOrange