After Tax Contributions

After Tax Contributions



After Tax Contributions
The phrase after tax contributions as​ it​ pertains to​ retirement accounts can often be a​ bit confusing .​
This article will discuss some of​ the​ common aspects of​ after tax contributions.
You might find it​ easier to​ understand the​ phrase if​ you​ think of​ after tax contributions as​ being voluntary contributions .​
These are contributions that you​ deposit into a​ retirement account or​ annuity after you​ have paid the​ required state and federal taxes on​ it.
Conversely,​ before tax contributions are those funds that you​ put into an​ account that have not been subject to​ taxes .​
When this money is​ withdrawn later on​ you​ will have to​ pay that tax at​ that time.
Generally speaking,​ most people prefer after tax contributions because when they withdraw the​ money they will not be taxed again .​
There is​ some belief (and perhaps rightly) that taxes only go up as​ time passes by,​ and that if​ they wait to​ pay the​ tax on​ their contributions later the​ tax will be higher.
Another important issue between the​ two is​ that if​ you​ take money out of​ a​ before tax account that amount of​ money will be added to​ your stated annual income for that year .​
In other words,​ if​ you​ make a​ salary of​ $40,​000 and you​ take out $20,​000 of​ before tax contributions your income tax for this year will be for the​ full $60,​000,​ which can place a​ heavy burden on​ you​ when tax time comes around.
On the​ other hand,​ if​ your money was in​ an​ after tax contributions account,​ you​ can take that money out and since the​ taxes have already been paid on​ it,​ you​ face a​ much lower tax burden .​
You may have to​ pay some tax on​ the​ interest that has accrued,​ but that is​ all .​
Any money that you​ remove from an​ after tax account will come to​ you​ in​ full,​ just as​ if​ you​ were taking it​ out of​ a​ savings account.
As you​ can see,​ the​ differences between these two plans can be dramatic,​ so it​ is​ important to​ get the​ right plan for your needs .​
One way to​ make the​ best decision is​ to​ speak with a​ financial planner who can go through the​ various scenarios with you​ and help you​ decide which type of​ contribution program will benefit you​ the​ most.
You can also speak with the​ HR people at​ your work .​
They may be able to​ give you​ further insight into which plan is​ best for a​ person in​ your circumstance .​
They may also tell you​ that you​ have no choice but to​ use the​ program that they have set up .​
Even if​ you​ find yourself using a​ plan that you​ would rather not have,​ it​ is​ best to​ know how the​ programs can affect you​ should you​ ever need to​ take money out of​ your account,​ especially if​ you​ have to​ withdraw that money before retirement age .​
Learning more about after tax contributions can only help you​ later on​ when you​ need to​ use the​ money that was put into the​ account.




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