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When you retire you will have two types of money available to you: taxable and tax-free. Which category would you like to have most of your retirement money in? Most people agree that tax-free money beats taxable money every time.
The taxable category includes withdrawals from all tax-deferred plans like standard IRAs, 401(k)s and 403(b)s. Other taxable investments include stockbroker accounts, annuities, lottery and casino winnings, regular income, gifts, most inheritances, and capital gains taxes on real estate sales or business sales.
The tax-free category includes Municipal Bonds, ROTH IRAs, and most Life Insurance payments.
Free Money – Many employers provide matching funds to 401(k)s of up to 3% or more of an employee’s income. This is known as Free Money, which is a good thing to have. Because smart investors know that all money invested into tax-deferred plans like this will eventually be subject to income taxes upon withdrawal, they only contribute the minimum amount needed to maximize their employer’s “free” portion. Any amount contributed over this minimum also falls into the tax-deferred column, so smart investors stop contributing more once the “free money” threshold is reached. Many advisors recommend taking advantage of this one only up to your minimum tax-deferred amount needed for the employer to contribute the maximum “free” money to your account.
Tax-Free Money – Maximize your future investments in this category instead of IRAs or 401(k)s. With a properly structured tax-free strategy, no income taxes are payable upon retirement on either your contributions or your gains. One of the best long term options. To learn more go to the Get Started page.
Tax-Deferred Money – In exchange for a small tax break now with IRAs or 401(k)s, you actually are just delaying paying income taxes until you begin withdrawing money at retirement, when you could be at a much higher Federal (or State) income tax rate costing you considerably more money than the taxes that were due on the income you originally tax-deferred. In agricultural terms, it’s better to pay income taxes NOW on the seed versus paying income taxes LATER on the entire harvest. Something your friendly financial advisors don’t tell you is that with tax-deferred plans like 401(k)s and IRAs, both your contributions and the entire growth in these accounts are 100% taxable on your withdrawals during retirement. This is not a good long term strategy unless you like paying Federal and State income taxes, which could be higher when you retire.
Taxable Money – Basically everything else falls into this category. Personal income, lottery and casino winnings, business income, gifts, etc. are all taxable. Very few if any tax breaks now or in the future. Avoid this option as much as possible.