It depends. Each option gives you a different benefit and the respective benefits will have a maximum positive impact depending on your current financial situation, retirement needs/goals and your expectations for future tax rates.
Pretax 401k contributions
Pre-tax contributions provide an immediate tax benefit because you do not pay taxes on income contributed to your 401k. You also get the benefit of tax-free growth in your 401k. The downside is that all of the pre-tax money in your 401k is taxable upon distribution.
401k Roth contributions
Roth contributions, on the other hand, do not provide an immediate tax benefit. You pay taxes on your contributions today, you then enjoy the same tax-free growth, but as long as your distributions are qualified then the entire amount comes out completely tax-free. Although Roth carries to allure of being tax free, it comes with its own downsides. You cannot leverage your 401k contributions to lower your current tax rate. You must assume that your retirement tax rate will be higher than your current rate. And you also must assume that Congress cannot change the tax-free distribution rule for Roth contributions.
Aftertax 401k contributions
After-tax contributions, like Roth contributions, do not provide an immediate tax-benefit. The contributions suffer taxes as income but they grow tax-free and upon distribution only the gains suffer taxes as income. It is most common for after-tax contributions to be used only when a participant has exceeded the pre-tax and/or Roth contributions permitted under the plan since it is the least tax advantaged option.
There are many tax, financial planning, investing and estate planning concerns that may play a factor in determining how to structure your contributions each year for maximum benefit. You should consider discussing your situation with a qualified financial planner or tax advisor to develop an individualized financial plan. Have legal problems with your 401k? Talk to a Dallas, Texas employee benefits lawyer by completing the form below.