What are the tax implications of different retirement plans?

What are the tax implications of different retirement plans?

The tax implications vary by plan. For example, traditional IRAs offer tax deductions, while Roth IRAs provide tax-free withdrawals.

Can you explain how withdrawals are taxed in a 401(k)?

Withdrawals from a 401(k) are taxed as ordinary income. If you withdraw before age 59½, you may also face a 10% penalty.

What about contributions? Are they tax-deductible?

Yes, contributions to a traditional 401(k) are typically tax-deductible, reducing your taxable income for the year.

Are there any tax benefits for Roth IRAs?

Yes, contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals are tax-free, which is a significant benefit.

What should I consider when choosing between a traditional and a Roth IRA?

Consider your current tax rate versus your expected tax rate in retirement, as well as your withdrawal needs.