Before-tax dollar investments are investment deposits that come out of your pay before income taxes are calculated. Your current taxable income is lowered so you pay less in income taxes. For example, if you earn $50,000 and contribute $3,000 to a 401(k) or 403(b) plan, your taxable federal income will be $47,000. When you take money out of a savings plan at retirement, however, it will be taxed as ordinary income.
After-tax dollar investments are investment deposits that are made with your income after taxes are calculated. Thus, after-tax contributions do not lower your current taxable income. In addition, you will not be taxed on the amount of the savings deposit upon withdrawal because this money was already taxed. You will, however, have to pay tax on any accumulated earnings unless this money is a qualified distribution from a Roth IRA.
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