The 25% post-tax rule
The 25% post-tax model suggests keeping your total monthly debt at or below 25% of your post-tax income.
The after-tax cost of debt represents the total interest paid on debt minus savings on your income taxes. In other words, you're adjusting your total cost of debt to account for the effects of your tax rate.
Simply put, pre-tax means that premiums are deducted before taxes are calculated and deducted; after-tax means that premiums are deducted after taxes is calculated and deducted.
The formula for the after-tax rate is: the loan interest rate of 10% minus (30% tax savings on the 10% interest rate) = 10% minus 3% = 7%.
The after-tax interest rate on the mortgage is the interest rate, multiplied by (1 – your marginal tax rate). In other words, it's the interest you pay, minus the tax savings you get back.
The standard rule of thumb is to save 20% from every paycheck.
Both pretax and Roth contributions have potential tax advantages. If you anticipate being in a higher tax bracket in retirement than you are now, making after-tax Roth contributions may help you because you'll be able to take out the contributions and earnings tax free.
If you take some of your earnings and invest through a brokerage account or Roth IRA, you'll be doing so with after-tax dollars. The main advantage of after-tax investing is that it can unlock tax- and penalty-free retirement income. For example, you can tap Roth IRA contributions at any time, free and clear.
To calculate the after-tax income, simply subtract total taxes from the gross income. For example, let's assume an individual makes an annual salary of $50,000 and is taxed at a rate of 12%. It would result in taxes of $6,000 per year. Therefore, this individual's after-tax income would be $44,000.
Post-tax deductions, or after-tax deductions, are expenses or contributions subtracted from an employee's income after taxes have been withheld. Unlike pre-tax deductions, which are taken out before calculating income tax, post-tax deductions are applied after taxes are taken out of an employee's gross pay.
The after-tax real interest rate is found by subtracting the product of the tax rate and nominal interest rate from the before-tax real interest rate. The equation is: After-Tax Real Interest Rate = Before-Tax Real Interest Rate - (Tax Rate * Nominal Interest Rate).
First, this rule is based on calculating 30% of gross income (before taxes and expenses), not net income, which is what a person collects after taxes, retirement savings, investment fees, and the like. Second, factor escrow expenses and other fees into mortgage payments and rents.
The Bottom Line. On a $70,000 salary using a 50% DTI, you could potentially afford a house worth between $200,000 to $250,000, depending on your specific financial situation.
Post-tax deductions are taken from an employee's paycheck after all required taxes have been withheld. Since post-tax deductions reduce net pay, rather than gross pay, they don't lower the individual's overall tax burden.
Your after-tax real rate of return is calculated by, first, figuring your after-tax pre-inflation rate of return, which is calculated as nominal return × (1 - tax rate). That would be 0.12 × (1 - 0.15) = 0.102 = 10.2%.
Highlights of changes for 2024. The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan is increased to $23,000, up from $22,500. The limit on annual contributions to an IRA increased to $7,000, up from $6,500.
While applying taxes reduces the amount of money available to invest, sometimes after-tax investment vehicles such as Roth IRAs can produce better overall returns because, unlike pretax accounts, withdrawals from these after-tax accounts can be made without owing taxes.
“This is simply a way for Congress to obtain more revenue for the federal government at the expense of seniors who have already paid into Social Security.
So what are after-tax deductions' primary advantages? One is that future benefits (such as Roth IRA withdrawals) will not be taxed when done according to the rules. Another benefit is that take home pay may be a little higher. The primary disadvantage of post-tax deductions is that the tax liability is also higher.
There are guidelines to help you set one if you're looking for a single number to be your retirement nest egg goal. Some advisors recommend saving 12 times your annual salary. 12 A 66-year-old $100,000-per-year earner would need $1.2 million at retirement under this rule.
9% of Americans have between $100,000 and $200,000 saved, and 4% have between $200,000 and $350,000 saved.
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.