| Do you have a 401(k)? | Now tax deferral and time can work for you. |
| A lot of people are already preparing for retirement by contributing to an employee retirement plan such as a 401(k). That's a smart move because you're saving money two ways:
1. You're taking a percentage of your paycheck and putting it away without paying current taxes on it. 2. You don't have to pay taxes on either the principal or earnings until you withdraw your money at retirement. These same tax advantages can apply to an IRA, although the favorable tax treatment varies depending on your income, whether you or your spouse participate in an employer retirement plan, and the type of IRA you have. As a general rule of thumb, it's a good idea to contribute the maximum allowed to a 401(k). But this amount may still not be enough to fund your retirement. An IRA can and add another level of tax advantaged savings for your retirement. |
Why is tax deferral such a big deal when you'll have to pay taxes eventually? Because when you're retired, you'll likely be in a lower income bracket so your taxes probably won't be as high as they are today. Plus, your contribution, and the earnings on your contribution, both remain inside the plan to generate more income as time goes by.
"Time" is the key word here. The impact of tax deferral increases dramatically over the years. Take a look at the hypothetical chart below. The first column shows the results of $2,000 per year put into an account where earnings are tax deferred. The next column shows what the account will be worth after taxes have been paid. The third column shows what would happen if you put the money into an account where earnings are taxed each year. After taxes on the full amount, the tax deferred investment leads by $6,538. |
| Growth of $2,000 annual contribution over 20 years. |
| $98,876 | ||||
| $82,369 | ||||
| $75,831 | ||||
| Value of tax deferred investment before distribution | ||
| Value of tax deferred investment after distribution | ||
| Value of taxable investment |
| These illustrations are hypothetical and are not intended to represent any particular investment. Assumes contributions are made at the beginning of each year with 8% annual interest rate throughout 20 years, and a one time withdrawal and tax payments at the end of 20 years. Taxable investment assumes taxes paid at the end of each year at a 28% tax rate. State and local taxes may also apply. |
There are two types of IRA'S: traditional and Roth. The main difference is the tax treatment.
TRADITIONAL IRA's:
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ROTH IRA:
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| Annuities Compound Interest |
IRA Basic's Long Term Care |
Traditional IRA Health Insurance |
Roth IRA Life Insurance |
IRA Comparisons Rule of 72 |
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