I like to call Roth Accounts the “Never Taxed Again” account because you are taxed on the money you put in, but you are not taxed when you take it out nor are you taxed on the earnings.
Traditional Retirement Accounts are tax-deferred. This means you get a tax deduction when you put money in, and you pay tax when you take money out (usually in retirement). Most typically, these are your Traditional 401k and Traditional IRAs.
Ok, so, you are maxing your retirement plans, you’ve got your college funding figured out and you have plenty of money for emergencies and other upcoming expenses – but you still have money left over. What to do?
We have many choices when investing. Today, we are going to look at the different ways an account may be taxed: now, in the future, and never again. Given these choices, we might think the “never taxed again” structure is best and the “taxed now” is worst, but there’s much more to the story.
I know that might sound odd as we tend to save throughout our working life and even sometimes well into our retirement years. But there will be times you need to withdraw your savings and it’s important to consider the tax implications.
We want to use all three of these when investing our Long-Term Portfolio and I’ll tell you why in a moment. But first, I want to talk through how each of them works.