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The Power of Roth-style Post-tax Retirement Planning
The vast majority of retirement and deferred compensation plans are pre-tax. This means, when a contribution is made to them, a deduction is available against earnings in the tax year of the contribution. There is a tax benefit to the retirement account holder in that same year. Many, if not most retirement plans such as pensions, 401k plans, and regular IRA accounts function this way. The taxpayer's income is reduced. Funds accumulating earnings in pre-tax accounts do so without incurring current income taxes. That isn't to say these earnings are tax-free. Nothing could be further from the truth. Upon distribution, ALL funds are taxed at the current income tax rate of the retiree. There are also extensive regulations and restrictions on how the money is to be distributed over the retiree's remaining life. On the other side of the retirement plan divide is the Roth IRA and similar post-tax retirement vehicles. Post-tax operates differently. No tax deduction is available in the year of the contribution (hence post, or AFTER the taxes have been paid on the earnings). Just as the pre-tax conventional accounts, the earnings from these contributions is not subject to taxation during the life of the plan. Unlike pre-tax, these earnings are not only not taxed, but are TAX-FREE. They do not incur tax liabilities during the plan and they are not subject to tax liability upon distribution from the plan. It's like a lifetime free pass on both the amount of the contributions which were made using dollars that have already been taxed once, and no tax whatsoever on the dollars these plans accrue. A very rare gift to the taxpayer from the government. The choice is yours: gain the deduction today and reduce your tax burden in the current year, and pay taxes on 100% of the principal and earnings during retirement, or cough up the taxes once, and have a lifetime of tax-free earnings into your golden years. If you make plans to reduce your tax liability on your earnings using non-retirement methods such as business deductions and maximizing the many powerful benefits inherent in the real estate tax code, you can avoid paying nearly all taxes during retirement (ok, this doesn't reduce sales tax, property taxes, gas taxes, liquor taxes and the like, but it's a BIG savings)
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