What Is A Tax-Advantaged Account?
Let's Cultivate (W)health
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Let's Cultivate (W)health 〰️
Any type of investment, financial account, or savings plan that is either exempt from taxation or tax-deferred.
There are two options for you. A girl loves options. You’ve probably heard people talk about a Roth IRA before. That is one kind of investment account, but someone could also have a traditional IRA. You see, the IRA is the type of investment vehicle. For example, a Volkswagen or a Ford. The Traditional vs. Roth classification is the make of the vehicle. For example, a Tiguan or an Explorer. Together, they make up the full investment account — a Ford Explorer or a Roth IRA.
So, how do you choose which is best for you? Let’s define the two makes of investment vehicles first.
Traditional/tax-deferred: You get to exclude the qualifying contributions that are not included in your taxable income. Any money you withdraw in the future, including your contributions and earnings, is subject to tax at your ordinary-income bracket.
The selling point for traditional/tax-deferred accounts: Pre-tax contributions start compounding from the time you contribute to the time you withdraw. You get a tax break based on the tax bracket you’re in when you contribute, but it is offset in the future by your future tax bracket when you pay ordinary income tax on your withdrawals.
Roth/tax-exempt: You get a tax-free accumulation of compounding investment returns on your after-tax contributions. You pay tax in your tax bracket upon contributing, so only your earnings are tax-free.
The selling point for Roth/tax-exempt accounts: You can withdraw your contributions at any time. Any future withdrawals on earnings from compounding returns are all tax-free, which means your money is growing for you exponentially and you won’t have to pay any taxes on those gains.
Invest Early & Invest Often
Disclaimer: this is not financial advice. This is only based on my experience and should be used for educational purposes only. Please always do your own research.**
