Retirement Accounts: Did you know you can choose to pay your taxes now or later?

I am planning a series of blogs about the two primary "flavors" of retirement accounts. I will break this down into two types: Roth and Traditional (Tax Deferred).

• Roth Accounts- you contribute to these with post-tax money, but the earnings are not only tax-deferred, they are TAX-EXEMPT. This is a very powerful feature meaning if you put $4000 into an IRA in 2011 and in 2025 you retire, the account is now worth $25,000 and you will owe NO TAXES on $21,000 you earned.
• Examples: Roth IRA, Roth 401K, Roth 457(b), and Roth 403(b)
• Traditional Accounts- you contribute to these with pretax money, and the earnings are tax-deferred. These plans offer a way to reduce your current taxable income. For example if I make $60,000 and contribute $15,000 to a 401K my taxable income is now $45,000. Which if I am single, my income between $45,000 and $60,000 were being taxed at 25% versus 15% for income between $8,351and $33,950. The bottom-line is this reduces my current tax liability and if I making more money now than in retirement, this is advantageous.
• Examples: Regular IRA, 401K, 457(b), and 403(b) 

This gives a short background about the types of retirement accounts in the United State today, the next blog I want to delve into some strategy on how to use the most effective combination of both Roth and Regular accounts and why.

Commonly use terminology defined:

• Contributions are the money that you put into the account initially
• Once in the account the contributions are referred to as the basis
• Post-tax means you pay taxes on the money before it goes into the account. 
• Tax deductible/pretax means you do not pay taxes on the money on the way into the account
• Tax-deferred means you do not pay tax on earnings as they accrue.