February 11, 2014
When looking at retirement savings it is important that you have all the necessary facts regarding the different tax strategies associated with various plans. Not all retirement plans have the same tax rules and some may be more beneficial than others. There are three “tax buckets” that should be reviewed when considering a retirement savings plan.
First is the tax deferred bucket, which makes up the majority of retirement savings through the workplace. These accounts defer tax payments until the individual takes the money out of the account. Although these accounts can lower your current taxable income, you must not forget the tax hit this money will receive when accessed.
Next is the savings plan that taps into money after taxes have already been paid. Plans such as a Roth IRA and a Roth 401 (k) take contributions after taxes have been paid and do not require the individual to pay taxes on the money when it is withdrawn. This particular plan is helpful for those individuals who have time to save.
Finally there is the retirement plan that collects after tax money through vehicles including money markets, mutual funds, brokerage accounts, stocks and bonds. As the money grows the interest and dividends must be paid annually.
There are no right and wrong savings plans, and all can be beneficial. It is important to be aware of the taxation involved with each in order to make the right decision for you.
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