Do you have the option for your retirement plan contributions to be either Roth or Traditional? If so, this is something that you should consider carefully when deciding how to set up your contributions.
Roth is the term used for saving money after taxes. This means you pay the taxes now.
How do Roth contributions work? Taxes are paid on the money you contribute to your retirement plan in the year you earned that money. Then you won’t owe taxes on any of the money (contributions or investment earnings) when you withdraw the money from your account in retirement.
Traditional is the term for pre-tax savings. This means you pay the taxes later.
How do traditional or pre-tax contributions work? You don’t pay income taxes on the money you contribute to your retirement plan in the year you earned it. This means your taxable income for the year is reduced by the amount you contributed to your retirement plan in that year. The contributions and investment earnings will then all be taxable as income when you withdraw the money in retirement.
Ideally, you save money in the traditional portion of your account if you think you will be in a lower tax bracket in retirement and you save money in the Roth portion if you think you will be in a higher tax bracket. Financial planning can help you understand the implications of this decision and help you figure out which option makes the most sense for you.
If you want help understanding which option is appropriate for you, you can schedule a no-cost meeting with one of our financial planners today. Financial planning is a process that can help you understand which course of action to take and so much more! To schedule your consultation, please contact us at (607) 217-5091 or visit www.seepdg.com/contact today.
Amy Michaels is a Partner and Financial Planner at S.E.E.D Planning Group. She holds the CFP® (CERTIFIED FINANCIAL PLANNER™) designation and oversees all of S.E.E.D.’s Financial Planning Programs. She created the Sprout program in order to help young people have better conversations about money and finances.
S.E.E.D. Planning Group LLC (S.E.E.D.)is a Registered Investment Advisor (RIA) with the SEC. S.E.E.D.’s team provides investment fiduciary and financial planning services to clients. Our fees are disclosed, easy to understand, and not predicated on product sales.