Let’s talk about how you actually put money into the retirement plan.
In a traditional retirement plan, money is put into the plan PRE-TAX, before any taxes are deducted. This can reduce your taxable income for the year, but doesn’t mean that you actually avoid the tax on that income. You end up having to pay the tax later on, when you take the money out of the account. The hope is by then you will be in a lower tax bracket and end up paying less tax.
In a Roth retirement plan, money is put into the plan POST-TAX, after taxes have been paid. Since you already paid tax on it, you do not need to pay tax when the money is taken out of the account (at least five years later). Why is it called a Roth account? Because the bill that established it in 1997 was sponsored by Senator William Roth.
Do you have questions about retirement savings? Clergy Financial Resources can help. We offer clergy support as part of our 1040 preparation process, or alternatively as a separate Pro Advisor meeting. For more information, visit our website at https://www.clergytaxnet.com/resources/proadvisor/.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
For more information or if you need additional assistance, please use the contact information below.
Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
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