After-Tax- (Private Savings, i.e. CD) – After-Tax Strategy is when you set aside a portion of your after-tax income into an account earmarked for retirement. Taxes are paid annually on any earnings. An example of this type of savings is a Certificate of Deposit.
Tax-Deferred- (Annuities) – Tax-Deferred Strategy is when you set aside a portion of your after-tax income into for retirement, earnings on the account grow tax-deferred. When retirement income is taken, taxes are due on the tax-deferred gain. A Non-Deductible IRA or an annuity is an example of this type of savings.
Pre-Tax- (Traditional IRA, Qualified Plans 401k and 403b) – Pre-Tax Strategy might include an Employer sponsored qualified plan like a 401k and 403b plan. You don’t pay current taxes on contributions made to the plan and earnings grow tax-deferred. Later when you take retirement income the benefits are income taxable.
Tax-Free- (Roth IRA, Permanent Life Insurance) – Tax-Free Strategy is similar to Tax-Deferred Strategy: you set aside a portion of your after-tax income, and earnings grow tax-free. A Roth IRA is an example of this type of savings. Another type of financial vehicle of this Tax-Free Strategy is Permanent Life Insurance.
Roth IRAs: Good choice…if you qualify. In order to contribute to a Roth IRA your adjusted gross income must be below a certain threshold. In 2018, contributions are limited to $5,500 per person unless you’re 50 or older and then you can contribute an extra $1,000 as a catch-up provision.
What are your options if you don’t qualify for a Roth IRA, or if you want to contribute more?
Permanent Life Insurance: The primary purpose for purchasing Permanent Life Insurance is for the death benefit protection that it provides. However, Permanent Life Insurance offers the ability to build up tax-deferred cash value that can be accessed during your lifetime to generate a stream of retirement income – potentially tax-free.