10 Things You Must Know About Roth Accounts - blog series • Pay Taxes Later

Tax-free income is a dream of every taxpayer. And if you save in a Roth account, it’s a reality. Roths are the youngsters of the retirement savings world. The Roth IRA, named after the late Delaware Sen. William Roth, became a savings option in 1998, followed by the Roth 401(k) in 2006. Creating a tax-free stream of income is a powerful retirement tool. These accounts offer big benefits, but the rules for Roths can be complex. Over the next two weeks, stay tuned for 10 things you must know about the Roth! To get you started, here is #1:

You Pay Uncle Sam Now, Instead of Later

Roths turn traditional IRA and 401(k) rules on their head. Rather than getting a tax break for money when it goes into the account and paying tax on all distributions, with a Roth, you save after-tax dollars and tax-free withdrawals in retirement.

By accepting the tax breaks for traditional accounts, you accept the government as your partner. If you’re in the 25% tax bracket, for example, 25% of all earnings will effectively belong to the IRS to be collected when you withdraw the money. With a Roth, 100% of all future earnings are yours.

The Roth strategy of paying taxes sooner rather than later will pay off particularly well if you’re in a higher tax bracket when you withdraw the money than when you passed up the tax break offered by the traditional account. If you’re in a lower tax bracket, though, the Roth advantage will be undermined.

Kiplinger Online