The Three Varieties of Tax Treatment
12 Aug 2015
This is my advice for most of clients: In your accumulation years, do all you can to get as much money as possible into your employer plan, and then we’ll talk about what’s next. You will have plenty of opportunities ahead, but it’s important to understand that assets come in three varieties when it comes to tax treatment. Whether an asset is always-taxed, tax-deferred, or tax advantaged should play a major role in investment decisions.
- Tax advantaged: You pay income tax on the money before you put it into the plan, but all of the distribution is free from taxation.
- Always-taxed: When you post earnings and have distributions, even if you reinvest them, the government will presume that you have taken “constructive receipt” of the money, and it will want its tax on the amount of that gain.
- Tax-deferred: meaning the amount you contribute is shielded from immediate taxation, but during your retirement you will pay tax on all the withdrawals.
As you make your investment decisions for your future, therefore, you need to pay close attention to developing a strategy for how the money will eventually be distributed.