How are retirement savings taxed?
The money you save for retirement is usually taxed in one of two ways:
- Traditional (tax-deferred) - instead of paying federal income taxes when contributions are made, you pay them when you start taking withdrawals. Assuming no withdrawals are made until you retire, you may be in a lower tax bracket when the taxes are eventually paid.
- Roth (after-tax) - you pay taxes on the contributions when you make them, and might be able to later withdraw both the contributions and the earnings on those contributions tax-free, if certain conditions are met
It’s always a good idea to consult with your tax professional for answers to your specific tax questions.