The government encourages us to save for retirement by allowing us to not pay tax on the income we've used to put money into our retirement accounts. This helps to accelerate the growth of your retirement savings. The government also provides an option that allows taxpayers to put after-tax dollars in a retirement account and not pay tax at all as you begin taking the money out during retirement. There are several types of retirement accounts, but the two primary types of retirement accounts are Traditional IRAs and Roth IRAs. Traditional IRAs function similar to a 401K plan. This type of account utilizes pre-tax dollars (your gross wage before taxes are taken out of your paycheck) to fund your retirement account. A Roth IRA utilizes after-tax dollars to fund your retirement account and once you begin taking your money out during retirement, the money is not taxed, including the money made on investments.
There are several intricate rules as to how much money you can contribute to a Traditional IRA, 401K, and Roth IRA as well as income limitations to contribute to Traditional IRAs and 401Ks (for higher income individuals). Roth IRAs have higher income limitation thresholds, so as your income increases over your career, you may have to contribute to a Roth IRA or make after-tax contributions to a 401K or Traditional IRA. This is where tax planning becomes crucial. A CPA can advise you on the best options available to you as it relates to your retirement accounts to minimize your tax burden and keep more money in your pocket while weighing your future tax implications. Reach out to me if you have questions, I'm more than happy to help!
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