THE NO-COMPROMISE RETIREMENT PLAN • 31
The Tax Status of How You Save There are three main tax structures you can save under for re- tirement.
Taxable Saving Taxable saving means you don’t get a tax deduction for the funds you put in the account, AND you pay taxes on your earnings each year. For example, think about your savings account at the bank. Each year, you pay taxes on your income and then put some of that income into your savings account. When you file your taxes, the interest earned on your account is subject to taxation. So, every year, the IRS is taking a small cut. The majority of retire- ment savings are not held in taxable accounts, though most people have some long-term savings in this kind of structure. For exam- ple, many brokerage accounts are taxable. Usually, real estate is taxable; so are typical CDs and money market accounts you can get at the bank. Unless you acquire these types of assets through a qualified retirement plan, they are taxable. • Pluses : These may be the only option for some of your funds, or some of the account types you want. • Minuses : Paying taxes on earnings each year reduces the amount growing by the tax bill, so you have less money compounding. Tax-Deferred Saving This is the most common way to save for retirement. Tax-de- ferred accounts work like this: you do not pay any taxes on your contributions today. In the future, when you access the funds, you pay taxes on your contributions and all the earnings associated with the account. This is how traditional 401(k)s and IRAs work.
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