For comparability, the before-tax contribution
to the regular IRA is $10,000, while the contributions to the brokerage account and the Roth IRA are with after-tax dollars--$6,700 for Emma and $7,500 for Lucas.
However, if the employer offers a match, the employee can earn more match dollars by making a before-tax contribution.
Before-tax contributions are deductible from current-year income, but the principal, interest, and capital gains are taxed at the ordinary income tax rate upon withdrawal.
The average before-tax contribution
rate remained flat at 7.
The following is an example of the tax treatment of $1,000 invested in a TFSA plan versus an RRSP plan for one year: RRSP TFSA Before-tax contribution
$1,000 $1,000 Tax (30 per cent) -- $300 Net contribution $1,000 $700 Investment income five per cent $50 $35 Value of investment $1,050 $735 Tax upon withdrawal (30 per cent) $315 -- Value of investment after tax $735 $735
Therefore, if an investor expects to be in a higher marginal tax bracket during his/her earning and investing years than during his/her retirement years, the Traditional IRA provides higher after-tax withdrawals on an equivalent before-tax contribution.
For instance, for an equal before-tax contribution of $3,000, investors would end up with less after-tax money if they pay 40% before contributing (Roth) than if they wait and pay only 30% while withdrawing (traditional).
The main disadvantage of these plans, according to Rosen, is that you must follow all the IRS guidelines that govern them, as is the case for any IRS-qualified, before-tax contribution
Section 125 plans also allow employees to make before-tax contributions
to personal spending accounts that can be used for qualifying health-care or child-care expenses.
This is the reverse of the traditional 401(k) which allows employees to make before-tax contributions
, but then fully taxes all retirement withdrawals (see chart, page 279).
However, these tax benefits still do not generally outweigh or overcome the tax advantages of making either after-tax contributions to a tax-free investment, such as a Roth IRA, or before-tax contributions
to a tax-deferred investment, such as a 401(k) plan.