When planning your retirement, you ought to consider planning your taxes as well. An employment retirement program uses pre-tax dollars, which means that you will pay taxes on distributions when you reach the appropriate age. You could also pay a hefty tax penalty if you remove funds from the account before that age.
Employment retirement plans are a good way to plan for retirement, but they may not provide you with the most bang for your buck. If you want to keep more of your money in your golden years, you may want to consider a Roth IRA. It may provide you with better tax planning. Only after you have the appropriate information can you make an informed decision.
How do taxes work with a Roth IRA?
Since you do not contribute to a Roth IRA through your employer, the money that you put into it comes from dollars you already paid taxes on. This means that you don't pay taxes on withdrawals when you reach retirement age. The contributions you make to the account grow without taxation just as the contributions made to an employment retirement plan such as a 401(k). You need to be aware that some notable exceptions exist that could affect your taxes.
Another attractive benefit of a Roth IRA is that you can withdraw your contributions at any time without any tax penalty. This is quite a difference from an employment retirement plan that charges a 10% penalty for withdrawing funds prior to the current retirement age of 59 1/2. You notice that these tax-penalty-free withdrawals only apply to your contributions. Any money the account has earned, your gains, cannot be touched tax-free if you withdraw them prior to retirement age.
How do taxes work for your heirs?
Even your heirs receive tax benefits from your Roth IRA. Your spouse could simply put it into his or her name or roll it over into his or her own account after your death. Any heir other than your spouse will have to begin taking distributions from the account beginning the year of inheritance. The good news is that they do not have to pay taxes on those withdrawals.
These tax benefits are only part of the picture, however. In order to make sure that this would be the right choice for you, discussing your options with an Oregon tax attorney could provide you with the answers you need.