Tax Deferred Retirement Investments

Traditional IRA and 401K accounts for retirements represent tax deferred investments. Money that is invested in these types of savings programs represents pre-tax dollars. Taxation is deferred until such time that the investor withdraws the money. The idea is that one's tax bracket is likely to be lower when money is withdrawn, thus resulting in a savings on the total tax bill.

When you reach retirement age, and you begin withdrawing money from your tax deferred retirement account, you will pay income taxes on the initial amount invested and you will also have to pay tax on the interest earned on the money while it is in the account.

Roth Retirement Investments

With a Roth IRA, you are actually investing post-tax dollars. Instead of deferring tax payments on the income invested until you withdraw the money, you pay the taxes now. However, there is an important investor benefit of Roth IRAs that many people overlook. The gains made on money invested in a Roth account is completely tax exempt.

When you withdraw money from your Roth IRA after reaching retirement age, you don't have to worry about getting hit with taxes on either the initial amount invested or any of the interest accrued over the years. For many people the long term benefits of tax free Roth IRA gains is much more appealing than the ability to defer taxes on ordinary income at the present time.

Tax and Investment Considerations

When investigating options for retirement planning, it's important to consider both the short and long-term tax consequences of your decisions. By understanding the tax implications of Roth IRAs and traditional retirement accounts, you can make informed decisions regarding which investment opportunity makes the most sense in your particular situation.

Keep in mind that you don't have to choose one or the other. Many eligible investors choose to utilize both options, to maximize their opportunities for accruing retirement income and enjoying tax savings now and in the future.