GTGWAS Step 2 Topic C Taxable vs Tax Deferred Savings

Posted 2 months ago in Economics and Trade.

The Benefits of the Roth IRA - Taxable vs Tax Deferred vs Tax Free Income

GTGWAS Step 2 Topic C Taxable vs Tax Deferred Savings

Here is a common myths about the ROTH IRA

*****If I invest into a ROTH IRA it won’t benefit me because I can’t get the tax deduction. *******

This is another misconception for a lot of people and understanding the benefits of a Roth IRA could save you thousands in taxes down the road.  As we have previously discussed contributions into a ROTH Ira are made with after tax dollars.  In contrast contributions into a 401(k) are made with pre-tax dollars (money invested into 401(k) is not taxed until withdrawn).  In other words, the contributions into a Roth IRA will be from the money in your checking account.  After tax dollars are deposited into your checking account.  Your after-tax dollars may be moved into a savings account, a CD, or even in mutual funds.  But it still remains as after-tax dollars and any interest earned for the year will be reported on a 1099 for that year. As you pay taxes on the earnings each year the account then is always in after tax dollars. If you have money, extra money that you don’t need to pay bills or for an emergency and if you have w-2 type wages for the year, then it might be a wise move to move some of it into the Roth IRA.  Both accounts will be in after-tax dollars but the Roth IRA earnings from that point on will be tax deferred and at 59 ½ will be available as tax free withdrawals.  This could save you lots of money in taxes in the future and you can invest the money as aggressive as you want, get higher rates of return but have no tax consequences each year.  Let me repeat that part.  The money is already sitting after tax dollars. You are just moving it to a different type account to shelter the earnings from taxes.  It did not cost you any money in taxes each year that you contribute to the Roth IRA. Currently you can contribute up to $5500 per year if you are below 50 and $6500 if you are 50 and over.  As long as you have W2 type earned income or SE income up to the net profit or the limits you can contribute to an IRA.  Again, this is a great tax strategy that everyone should be taking advantage of for that extra money that is lying around in accounts earning virtually nothing.

Roger - Your Money Coach


Living in United States