THE NEW RULES OF RETIREMENT SAVING • 49
money than you would have paid when you deposited the money. That is one reason the tax-deferred approach is often recommended for individuals who believe their tax burden will be significantly lower in the future than it is today. Either way — whether your tax rate is higher or lower — you will still need to pay taxes on all the growth within your account in a tax-deferred savings program. If you have a 401(k), every single penny in it will be taxed when you withdraw the money. Upfront Taxes If you’re saving money using an approach that pays taxes up- front, like a Roth 401(k) or Roth IRA, taxes could impact you dif- ferently. If your tax rate is higher when you withdraw your funds in retirement, you will avoid paying that higher tax rate, as you can access your funds tax-free. If your tax rate is lower when you access your funds in retirement, there is a potential discrepancy between the tax rate you paid upfront on your deposits and the tax rate you could have paid instead when accessing the funds. This is one reason this ap- proach is often recommended for individuals who believe their tax burden will be higher in the future than it is today. Keep in mind that either way — whether your tax rate is higher or lower — all of the accumulated growth in your account will not be taxed. That portion of your account will remain tax-free in ei- ther scenario. Which Should You Choose? I’ll come right out and say it: I strongly urge you to save tax- free. That means paying your taxes now and accumulating your assets tax-free. I have moved both of my children from tax-deferred to tax-free savings approaches. I have helped hundreds of savers do the same.
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