IS YOUR 401K AN INVESTMENT?
Updated: Jul 4, 2020
Let’s talk about everyone’s favorite subject…. retirement tax codes! Fine, no one ever wants to talk about tax codes, but there are some very basic, yet important, things you need to know when it comes to these codes. Now you may be thinking to yourself I don’t know what retirement tax codes are?!? That may be true that you didn’t realize what they were, but I can almost guarantee you talked about them before. Have you ever brought up a 401k? What about IRA or Roth? If that’s the case, then you’re already familiar with these tax codes!
But isn’t my 401k, IRA, or Roth an investment?
Nope just a tax code, the stocks, bonds, etc. within these tax codes are your investments.
There is quite a bit to know and to understand about each of these, but here are the basics. First off retirement tax codes such are 401k, 403b, 457, IRA, and Roth IRA are all meant for one thing and that’s to allow your investments to grow tax deferred until you’re of retirement age. Tax deferred does NOT mean tax-free! That said, you will either pay taxes up front or on the backend when you take your money out in retirement.
401k, 403b, 457, IRA, etc. all, but a Roth are funded with pre-tax money. This means the money goes in isn’t taxed, grows tax-deferred, and is taxed when you tax your money out. The theory is your tax bracket will be lower in retirement and you’ll pay less taxes. Seeing as our country has an unsustainable amount of debt who knows if that theory will hold true in the next 5, 10, or 20 years.
A Roth works the opposite, this is money you paid income taxes on once upfront, the money put into the Roth goes tax-deferred, then in retirement your funds come out tax-free! As I mentioned before these are the basics. There is more to know like converting your IRA funds into Roth funds, but that is a subject for another time so stay tuned!