The number one
fact to always remember is that you are taxed on EARNINGS
(and
capital gains, interest, and dividends if you have any),
and NOT what
you deposit from your earnings into checking, savings, and brokerage
accounts whether those accounts are tax
deferred or not.
So whether you
put money into a Traditional or Roth IRA and/or 401K, there
is NOT a
single penny of additional
taxes due to the government.
Both
Traditional IRAs/401Ks and Roth IRAs/401Ks have very different tax
savings implications:
However,
Traditional IRAs and 401K
“tax savings”
are a government “trick”or
“shell game”
that you want to avoid. Sure you get tax savings for the year you
invest in them, but that's the trick that suckers you in. When you
withdraw from those Traditional accounts (and the government forces
you and/or your heirs to withdraw from them later in life), it will
likely be decades later when they have doubled in size several times
and thus are much, much larger than your initial investments. All of
that money (original investment plus what it has grown to) is taxed.
This is a great tax bonus for the government and a tax disaster for
you, even if you are in a lower tax bracket when retired because
there is so much more money subject to tax.
On the other
hand, a Roth IRA/401K is a legitimate and very large tax savings for
you. You
paid zero extra taxes each year when you made deposits into those
Roth accounts and you pay no taxes when you withdraw from those
accounts, which likely have also doubled in size several times over
decades, no matter how much money is withdrawn. Plus the government
does not force the original owner to withdraw ever.
Now
some employers offer Traditional 401Ks, but unfortunately may not
offer Roth 401Ks. If there is a substantial company match to your
deposits into those accounts, then given the fact that there is no
Roth 401K alternative, you do want to take advantage of that
opportunity.
For
heirs to IRA and 401K accounts, the government forces you to make
withdrawals even if it is a Roth account. You won't be taxed on the
Roth account withdrawals, but you will be taxed on Traditional
account withdrawals. My advice in either case, is take as much money
from those forced withdrawals as the government allows or you can
afford and reinvest it into Roth IRAs and/or 401Ks. Remember from
above, it costs you nothing in additional taxes to do this, plus it
saves you lots of taxes in the future as opposed to putting it in a
Traditional IRA or 401K account or a non-IRA account.
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