After-tax contributions are funds that are paid into retirement or investment accounts, after income taxes on those earnings have already been deducted.
When people open a tax-advantaged retirement account, they have the option to defer the income tax payments until they retire, if it is a traditional retirement account, or pay the income taxes in the year in which the payment is made, if it is a Roth retirement account
| After Tax | Roth |
| Funds that are paid into retirement or investment accounts, after income taxes on those earnings have already been deducted. | A type of after-tax retirement or investment account. |
| Already tax-free. | Need to be kept in the account for at least five years in order to be tax-free. |
In order to encourage Americans to save money in order to retire, the government offers several tax-advantaged retirement plans. Among those plans, there is the 401(k) plan, which many companies offer to their employees. And there is the IRA, which anyone with earned income can open through a bank or a brokerage.
The owners of traditional retirement accounts have the right to put pre-tax money in an investment account. So the money that you receive will not be subject to income tax in the year that it is paid in.
The average gross income that the saver gets during that year is reduced by the amount of the contribution. After the bank card holder withdraws the money, which is a common thing with retirees, the IRS will receive that money.
The Roth Account is the option that you can use to obtain money after taxes. It allows the person who saves money to pay in money after the money is taxed. That is really a small hit to the person’s immediate take-home income. After you are retired, there are no more taxes owed on the entire account balance.
The Roth 401(k) Option, which is also called a designated Roth option, is fairly new, and not all companies offer it to their employees. Earners whose earnings exceed a set limit do not qualify for contributing to a Rotary account.
The advantage of pre-tax retirement is that you can put a large amount of money in a nest egg that is not subject to further taxes. It makes the most sense to use this plan to those who believe that they may be paying a higher tax rate in the future, either because they are expecting to receive a higher retirement income or because they believe that taxes will go up.
The monies that are contributed after tax are able to be withdrawn at any time, without any penalty. (the money that is made in the account will not be touched until the account holder turns 5912).
A Roth IRA is defined as a retirement account. The earnings in that account are tax free for as long as the money is kept in that account for at least five years. When you contribute to a Roth, you are contributing dollars that are after tax, so they are not tax deductible. You can still withdraw those contributions during your retirement, and the contributions will not be taxed.
