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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 Savings For Average People News
Agencies need more volunteer tax preparers (The Champaign News-Gazette)
CHAMPAIGN – The economic crisis poses new tax challenges for low-income families fighting to keep their heads above water. Tax refunds are a "lifeline" for many families, used to pay off debts, cover child expenses or start savings accounts, says David Marzahl, executive director of the Center for Economic Progress.
Read more...Agencies put out call for more volunteer tax preparers (The Champaign News-Gazette)
CHAMPAIGN – The economic crisis poses new tax challenges for low-income families fighting to keep their heads above water. Tax refunds are a "lifeline" for many families, used to pay off debts, cover child expenses or start savings accounts, said David Marzahl, executive director of the Center for Economic Progress. Those who have gone through foreclosure or debt reorganization this year may ...
Read more...Amid budget crisis, Wis. cuts Social Security tax (AP via Yahoo! Finance)
Despite the worst budget deficit in Wisconsin history, many middle-class and wealthy senior citizens are on track to get tax breaks worth an estimated $118 million next year.
Read more...Tax revaluation causes anxiety (Daily Princetonian)
As Princeton Borough and Princeton Township prepare for their first property-tax reassessment since 1996, residents are taking a hard look at factors that make both municipalities’ property taxes among the highest in New Jersey...
Read more...Dark Fiscal Future for Schools (Washington Post)
For the first time, Prince William County, which has one of the region's fastest-growing school systems, could see its education budget shrink in the coming year because of plunging house values and a likely residential property tax cut.
Read more...