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The 401k – Tax Free or Tax Deferred Savings?
from:We commonly refer to our 401k accounts as tax free savings. And, it’s true that we don’t pay taxes on any money we contribute to our 401k accounts during the year we contribute it. However, it’s also important to realize that we do pay taxes on our 401k accounts during retirement when we withdraw the money for our living expenses. Therefore, a traditional IRA or 401k account is really a tax deferred savings account, not a tax free one.
Now, this doesn’t mean that 401k accounts or IRAs are bad. In fact, they are, and should be, the cornerstone of retirement planning. But it is important to understand that you will pay taxes on every dime that you withdraw from your 401k account – even the interest you’ve earned over the years. As you withdraw, this money becomes taxed just like any other income you receive. So, you’re deferring the tax on the money until you’re using it – hence the name tax deferred savings. It’s also likely that you pay fewer taxes on this money than if you had paid taxes on it while you were working. Most of us have a lower income during our retirement years, so we pay taxes in a lower tax bracket. This means that our tax deferred savings will likely get taxed at a lower rate than at the time we earned it.
But, there is a way to have some actual tax free savings for your retirement, rather than having all of your retirement money in a tax deferred savings status. This is the Roth IRA account. With a Roth IRA, you invest money into your retirement account on an after tax basis, not a pre-tax basis. Because you invest after tax money in a Roth IRA, your withdrawals are tax free. Even earnings on your contributions are tax free, so long as you wait until age 59 ½ to begin withdrawing these earnings. Therefore, Roth IRAs can provide some actual tax free savings, in contrast to traditional IRAs and 401ks, which are just tax deferred savings.
Another advantage to the Roth IRA is that it is free from the minimum withdrawal requirements of the traditional IRA or 401k. Under current laws, beginning at age 70 ½, holders of an IRA or 401k account must begin taking minimum withdrawals from the account. With a Roth IRA, you are never forced to make withdrawals.
Most financial planning experts recommend a combination of Roth and traditional IRAs to plan for a secure retirement. Check with your financial advisor to come up with the best retirement accounts for you.
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Tax On Interest For School Savings News
Officials give details on school bond issue (Park Hills Daily Journal)
DESLOGE — North County school officials will be asking voters in April to approve a $8.5 million no tax increase bond issue.
Read more...Parents face college-vs.-retirement money quandary (The Journal News)
CHICAGO - The stock market slide that has decimated savings for retirement and college savings with equal savagery is forcing many parents into an uncomfortable choice of where to cut back first.
Read more...Parents face school of hard calls (Rocky Mountain News)
The stock market slide, which has decimated retirement and college savings accounts with equal savagery, is forcing many parents into an uncomfortable choice of where to cut back first.
Read more...Budget Battle: Round 1 (Gotham Gazette)
Get rid of a property tax rebate or more than three police classes of 1,000 officers -- each will save about the same amount. Increase property taxes by more than $200 for an average one- to three- family home or, maybe, slash supplies for public schools classrooms.
Read more...Self-Employed Are Frozen Out of Mortgages (WallStreet Journal via Yahoo! Finance)
The government's efforts to jump-start lending are bypassing the self-employed.
Read more...