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Dr. Don Taylor, CFA, Bankrate.com advice columnistMaximizing the employer's 401(k) match

Dear Dr. Don,
My employer's 401(k) plan does not yet offer a ROTH 401(k) option but they do match my 401(k) contributions at 100 percent of the first 5 percent for both the before-tax and after-tax contributions. The limit on before-tax contributions is $15,000 this year. The limit per year on all my contributions is quite high at around $44,000.

Since the company matches before-tax and after-tax contributions, what do you think of putting additional after-tax money in the plan? The investment choices are good and don't include any employer stock. I already max out my ROTH IRA each year. This looks like a guaranteed 5 percent return to me on top of whatever the market gives me.
-- After-tax Al

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Dear Al,
It's a bit unusual to see a company match of both pretax and after-tax dollars, but, since your employer takes that step, why not maximize the amount of the employer contribution to your account?

I'm going to assume that you don't have to contribute up to the limit of the pretax contributions before you become eligible for the match on the after-tax contributions. Your plan provider can tell you if that's not the case.

If my assumption is correct, you could stop contributing on a pretax basis at the limit of that match, and then contribute on an after-tax basis up to the limit of that match.

Let's say you earn $100,000 as an annual salary. You can contribute $5,000 pretax and the company would match that amount, and then you can contribute $5,000 on an after-tax basis, and the company would match that amount. The account will have a total of $20,000 in contributions and you contributed just half of that amount. Past that point, you could continue to make pretax contributions up to the $15,000 limit for the 2006 tax year, or another $10,000 in contributions. If you're over 50, you are eligible to contribute an additional $5,000 on top of that as a catch-up contribution, if the plan allows catch-up contributions.

Keep in mind that after-tax contributions reduce your paycheck by the dollar amount of the contribution, while pretax contributions aren't taxed on payday, so they reduce your paycheck by a dollar amount less than the amount contributed.

Thanks and a tip of the hat to David Littell, professor of taxation and the Joseph E. Boettner Research Chair at The American College for his help in answering this reader's question.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: Nov. 1, 2006
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