Financial Planning

Most of us are familiar with 401k, 403b and IRA. These retirement saving programs help you get a tax break today on the money you contribute to each saving program. When you contribute money to these retirement saving programs, you end up reducing your taxable income amount for that particular year. You can withdraw the amount after the age stipulated by the plan and you are taxed according to the prevailing tax rate of the year of withdrawal.

However, there are after-tax saving programs where you can contribute money after you have paid the income tax. Here you do end up paying taxes for the year you have made the contribution but the money in the account is compounded year after year and you can begin to withdraw the money from the age of 59-1/2.

These after-tax retirement savings are called Roth IRA and the best part is that you are not taxed once you start making the withdrawals. There is also no mandatory withdrawal age limit of 70-1/2 years as there is with the 401k, 403b and other IRA retirement plans.

The benefits are immense with a Roth IRA and you can have a staggering amount of savings by the time you reach 65 years if you make a concerted effort to start saving from an early age. You do not have to make large after-tax contributions to reap benefits in your retirement. Just small monthly after-tax contributions to Roth IRA will ensure that you have a large tax-free savings to live your life comfortably after retirement.

Usually tax experts advice people to save using a combination of 401k or 403b and Roth IRA. This way you end up avoiding some taxes in the present as well in your retirement life while making sure you build a nest egg for your retirement without too much ado.