Tax-deferred is when you don’t have to pay taxes on a particular account as long as your money remains in it. You wait to pay the tax until you take the money. Once you withdraw your money, it’s up for grabs and the IRS can begin to tax it.
Retirement plans are a great example. Money stashed away in annuities, 401(k)s, and IRAs is tax-deferred to varying degrees and can grow for decades until you reach your retirement age.
Now that Roth IRAs are undergoing a rule change, people at higher income levels can get access to these highly desirable accounts. Read on to learn what the new rules do and don’t allow you to do, as well as how best to convert to a Roth and the pros and cons of doing so.
“If I can take a portion of my assets and shift them over to a Roth, am I going to sleep better knowing they can’t be touched by future tax increases?” – Ben Norquist, president of Convergent Retirement Plan Solutions LLC
A ROTH IRA is like a traditional IRA, but the initial investment is with after-tax dollars. This means that you don’t pay taxes when you take the money out after retirement. This makes sense for people who have a low current tax rate but plan to make more money in the future. It also is a good complement to a traditional IRA for people who want to save more, versus less, for retirement.
An IRA is an investment account that has tax advantages; IRAs permit you to put in pre-tax dollars for investment. When you take the money out, you are taxed at the prevailing tax rate. Thus, it makes sense for people to wait to withdraw the money until they retire and have a lower tax rate (because they are earning less than they used to).