Much has been written about the benefits of retirement cost savings vehicles – 401(k)s, 403(b)s, IRAs, Roth IRAs, and other tax-advantaged cost savings plans. Such vehicles give a quantity of benefits. Most offer tax deferral on contributions and on earnings/growth and, for a few, the added bonus of an employer match. The Roth IRA and Roth 401(k) have no upfront tax deduction for contributions but offer tax-free earnings/growth. Additionally, because of the benefits, an incredible number of workers, who in any other case may not be conserving for pension, are saving on a regular basis responsibly. However, the truth for many folks approaching retirement is that a combination of 401(k)/IRA/Roth IRA accounts plus Social Security benefits might not provide enough to fund a cushty retirement.
Where will the others come from? While a purchased immediate set annuity is one option, there is certainly another option that is more flexible and perhaps more attractive from an income tax perspective – after-tax cost savings and investment accounts. Although it holds true that after-tax accounts do not offer upfront taxes deductions/credits or tax-deferred growth (or Roth-related tax-free growth), they do provide a true number of advantages.
No contribution limitations – Standard retirement programs have a maximum annual contribution cap. 5,500 additional for participants age 50 or old. 1,000 additional for age group 50 or old. After-tax accounts have no contribution limit. No income limitations – Most tax-advantaged programs have income limitations. Employer programs limit the degree of participation for workers with high earnings through anti-discrimination rules.
IRAs and Roth IRAs impose income caps which prohibit contributions for years where the caps are exceeded, although non-deductible IRA contributions are not subject to money limit. An after-tax account is open to anyone, of income regardless. Easy access to funds – Unlike employer retirement plans, after-tax accounts aren’t burdened by restrictive hardship or loan withdrawal provisions.
And, unlike most tax-advantaged plans, they do not involve 10% early withdrawal fines. Account holders can reach their money when they need or want to buy. Investment versatility – Participants in employer pension plans are limited by the investment choices chosen by their employers. Also, many IRA and Roth IRA investment options are tied to the account administrator. Having a taxable account, investment choices are unlimited. No minimum amount distribution requirements – Employer retirement plans and IRAs require account owners to take regular distributions starting at age 70-1/2, if the amount of money is not needed even.
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- There is no tax on maturity amount in case of PPF
The same is true, of age regardless, of inherited IRAs/Roth IRAs. Such distributions may elevate the taxpayer’s marginal tax rate and may also cause more Social Security benefits to be taxed. Distributions from an after-tax account are much more “kind” in conditions of impacting the income tax bill, both State and Federal.
Estate planning flexibility – Assets in after-tax accounts can be used in heirs at a stepped-up taxes cost basis or may be gifted during life time in a way that suits the owner(s). Options for employer retirement IRAs/Roth and plans IRAs are a lot more limited. Lifetime transfers, for example, aren’t allowed.
And while pension/IRA/Roth IRA property easily transfer on loss of life by beneficiary designation, such transfers to non-spouse beneficiaries require these beneficiaries take required annual distributions over their lifetimes with an associated taxes result – all at regular income tax rates. Will all this imply after-tax accounts are retirement/IRA/Roth and good IRA accounts are not?