Tax now means that any income from these accounts is taxable for that year. For example, you must report and pay taxes on income from savings accounts, certificates of deposit (CDs), guaranteed investment contracts (GICs), dividends from stocks, mutual funds, and mutual funds. currency market.
Tax after means that the amount you put in is pre-tax. Pre-tax money deposited into your account is money that you have not paid income tax on. But you will definitely have to pay taxes later when you withdraw. These accounts are also known as tax-deferred. In the United States, tax-deferred accounts typically come in the form of IRAs, 401(k)s, and 403(b)s.
In the US, when you start withdrawing your money after 59:30, you will be taxed at the ordinary income tax rate. But if you withdraw before 59 1/2, you will be charged a 10% penalty (with a few exceptions) in addition to taxes. Also, you cant keep the money there forever. You have to start withdrawing when you hit 70 1/2 or pay a penalty fee of 50% on the amount you should have withdrawn.
Most later tax accounts are designed this way. However, some After Tax accounts are tax-deferred but not tax-deductible. For example, the amount you put into a non-qualified annuity or a non-deductible IRA is after-tax, non-deductible. Tax only applies to tax-deferred withdrawals.
Tax benefits mean you generally won't have to pay tax on withdrawals from your account. The tax-advantaged investment is after-tax money because you paid taxes on it.
Roth IRAs, 529 College Savings Plans, TFSAs, and Life Insurance Values are accessed through partial surrender or withdrawals made in the form of loans distributed tax-free. These funds remain tax-free as long as the policy remains in effect. In the event of a lapse, any allocation in excess of the premium paid will be taxed immediately.
Where does your money go? Let's take a look at the tax treatment of the income of different types of investment accounts.
| Tax Now | Tax Later | TAX ADVANTAGED |
|---|---|---|
| CHECKING | 401(K)/403(B) | ROTH IRA |
| SAVINGS | IRA/SEP-IRA | 529 COLLEGE SAVINGS |
| CD | ANNUITY | MUNCIPAL BOND |
| STOCK* | PENSION | HEALTH SAVINGS |
| MUTUAL FUND* | ACCOUNT (HSA) | |
| LIFE INSURANCE | ||
| LONG TERM CARE BENIFIT |