How to save on taxes: Retirement accounts paid PersonalCapital
Roth retirement accounts also allow your contributions to grow tax-free, but unlike with traditional accounts, you don’t receive a tax deduction for the contribution. Instead, you won’t have to pay taxes upon withdrawal.
While contributing to Roth retirement accounts won’t result in a lower tax bill in the near-term, they can be a great way to save if you think your income will be roughly the same or higher in retirement. You don’t get a tax deduction when you contribute, but your withdrawals in retirement are tax-free. Keep in mind that, generally, if you are already in the 24% or higher federal tax bracket, you probably can’t contribute to a Roth.
On the surface, a Roth account might appear superior since its tax-exempt nature amplifies compounding investment returns over time. Unfortunately, it isn’t quite this simple. The most important factor to consider is future tax rates. If you expect your future tax rate to be lower, which it often is, converting might not make sense. It’s also important to note that a Roth conversion can also generate a large tax bill. If you have to pay this tax bill from the IRA account itself, then many of the benefits of a Roth account are erased. In other words, a Roth conversion is more impactful if you can pay the tax bill with an outside non-retirement account.
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