46 • MARTIN H. RUBY
Let’s say you make $80,000, but with deductions and credits your total taxable income becomes $72,000. If those deductions go away, you’ll essentially have $8,000 more dollars on which you must now pay taxes. That means you could owe $2,000 extra dol- lars in taxes. No. 4: They tax more things: This is another way the govern- ment could tax more of your income. Here’s a good example. You don’t pay Social Security taxes on every dollar you make. There’s a limit, called the Maximum Taxable Earnings. In 2014, the Social Security taxable earnings cap was $117,000. That meant if you made $90,000, you paid Social Security taxes on all of it, but if you made $120,000, you paid taxes only on the first $117,000. In that case, $3,000 would not be subject to Social Security tax. Things changed in 2015, however. The maximum taxable earn- ings for Social Security increased to $118,500. So if you earned $120,000 in 2015, you no longer avoided taxes on $3,000, only on $1,500. You pay more in taxes despite your income staying the same. ¹² Deciding When to Pay: Taxes and Your Retirement Accounts As you can see, there’s a lot you can’t control about taxes. One thing you CAN control is when you pay — when it comes to retirement savings, at least. No matter which approach you choose, all the money you save will be taxed in some way. But how it is taxed and when it is taxed depends on the vehicle you’re using to save it. There are two primary ways you can save for retirement. Let’s look at them both. Below is a 101 guide to how taxes are handled in retirement assets. If you already know the difference between a 401(k) and a Roth 401(k), feel free to skip to the next section. Or, read on for a brush-up.
¹² Social Security Administration. 2021. “Benefits Planner: Maximum Taxable Earnings (1937 – 2021).” http://www.ssa.gov/planners/maxtax.html.
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