Taxes.

If you don’t like paying them, there are ways to put them off for later. You can save even more on taxes simply by contributing to your workplace 401(k). There are many benefits to deferring taxes for a future date. If you make a substantial amount now, you might make less in retirement. So not only will you lower your tax bill today, you will have a lower tax bill tomorrow since you might potentially be in a lower tax bracket when you retire.

More Options

If you’re young or are currently in a low tax bracket, it would make sense to get the taxes out of the way now and invest into other tax-free options. For example a ROTH IRA or a ROTH version of a 401(k). This would be good idea since you’re in a low tax bracket now, you pay minimal taxes and all your money will grow tax free in the accounts. When you retire you can pull the initial investment + growth tax free. If your tax bracket went up or if tax rates go up in the future, you already paid your taxes when you were in a lower bracket.

Why Not Have Both?

You can have both! If you work a traditional job it’s wise to enroll in your workplace 401(k) anyways as most companies have a match. This is already 100% growth for free. Not only that but you pay less taxes by lowering your taxable income. This paired with a ROTH IRA can substantially increase your chances of retiring in the future. As mentioned before if tax rates do go up you can supplement some of your 401(k) income with money from your ROTH IRA and enjoy extra money tax free during retirement.

Bottom Line

Just be aware that there are contribution limits to the different types of accounts. It’s good to have multiple types of accounts as you don’t know what the future holds. There are benefits to both so it’s wise to take advantage of what they both have to offer. Also remember that these are just accounts, you have to select where the money goes and do additional research on funds and fees associated with them.

Just Remember:

401(k) or (regular) IRA – Tax Deferred. Pay taxes later when you decide to retire or withdraw. Also receive tax advantages now for deferring.

Roth 401(k) or Roth IRA – Tax Advantaged. Pay taxes on income like normal, but any money grown in the account will be tax-free after age 59 1/2.

Thank you for reading. Good luck and see you next Sunday,
– Pablo