|Contribution||Reduces taxable income in current year, except for Roth contributions||After tax money|
|Earnings||Grows tax free and is not taxed until withdrawal||Taxable each year as earnings occurs|
|Capital Gains||Ordinary income tax rate at withdrawal, except for Roth and college saving accounts.||Lower tax rate|
|Dividends||Ordinary income tax rate, except for Roth and college saving accounts.||Lower tax rate|
|Withdrawal||Retirement accounts are taxed as ordinary income with penalty for withdrawals prior to 59 1/2. College savings account withdrawals are tax free when used for qualified education expenses and taxable otherwise.|
No taxes on principal and can be withdrawn anytime and used for any reason
|Inheritance||Taxed as ordinary income||Cost basis steps up|
To me, the best type account will depend on the financial situation of the individual saver and the expected timing of needing the money. Deferring taxes or avoiding taxes is an attractive option for those in higher tax brackets. However, the benefit does come with restrictions, which, if not met, can be costly to the saver. Taxable accounts offer the greatest flexibility, since the money can be accessed anytime for any reason.
From our experience, we found it best to put money in tax deferred accounts that we were very sure we didn't need until retirement. If we thought we might need the money in the next five years (e.g. emergency fund, car purchase, down payment for house, etc.) we put money in a taxable savings account.
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This is not financial, tax or saving advice. Please consult a professional advisor.
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