Money Talks....

Thank you for joining us on this issue of Money Talks….We have been talking about taxing of Social Security and taxes in general.  We previously discussed about the 3 buckets of money.

·        Taxable

·        Tax Deferred

·        Tax Free

Today we will talk about the tax-free bucket.  In this bucket we have Roth IRA or Roth 401k and Life Insurance.

On a Roth IRA or Roth 401k, you are not taxed on the money you contribute.   For those who may not know what a Roth 401k is some employers offer an option to contribute to a 401k or a Roth 401k.   The traditional 401k is funded with your dollars before taxes.  You defer the taxes, and it lowers your taxable income.  A Roth 401k you are contributing with after taxed dollars.  So, when you contribute to either a Roth IRA or Roth 401k you are not taxed on the money you contributed.  This is also known as your cost basis.  You are however subject to taxes on the gains.  This is known as a capital gains tax.  For example, you have $200k in a Roth IRA.  You contributed $150k but made $50k.  You would pay taxes on the $50k.  Roth IRA also have income limits and contribution limits.

The other tax-free product is life insurance.  Not only does life insurance pass to your beneficiaries tax free upon your death but you can also position your self to use the cash inside of a life insurance policy to use at retirement.  You would still have some life insurance available upon your death.  One of the key features is that you are not restricted by the Required Minimum Distribution (RMD) are the 59 ½ early distribution rule.

Positioning yourself to have money in this bucket will save you later on in taxes.  Think of it this way, if you were a farmer would you rather pay taxes on the seed or the harvest.  Of course, the seed.  That is what you are doing with the items in this bucket.

Until next time,

Diane