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If you have a 401k or a traditional IRA, then you have a tax deferred account. Tax deferred means that you are deferring paying taxes until a future time. If you take a look at your paystub, you’ll notice that your contributions are deducted before taxes are withheld. So when you make tax deferred contributions, you are not paying taxes at that time.
This might sound like a good deal right? After all, who likes to pay taxes. However, it’s important to understand what paying taxes later really means.
Do I have to pay taxes later?
Yes you have to pay taxes! Have you heard of the saying: There are two things in life that are certain – death and taxes. If you do not pay taxes now, you will have to eventually pay taxes later.
Now let’s stop and think for a second. If we think about it, whenever we earn more money in our paycheck we end up paying more in taxes right?
So if we save $100,000 in your 401k and we know we will have to pay taxes on this money at a later time, how much will we end up paying in taxes? Most importantly, how much of our hard earned money will we get to keep after paying taxes?
Is there a better way to avoid paying taxes?
Luckily there are strategies you can take to minimize taxes (not avoid). If you have assets sitting in the bank or most of your savings in a tax deferred account, it’s best to discuss your options with a licensed financial professional.
One thing to keep in mind is that taxes are inevitable and are only going to increase.
The Tax Bomb in Your Retirement is a good book that explains just how your traditional 401k or traditional IRA and taxes really work. I am a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for me to earn fees by linking to Amazon.com and affiliates sites. As an Amazon Associate, I earn from qualifying purchases. Amazon and the Amazon logo are trademarks of Amazon.com, Inc. or its affiliates.
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