On this week’s Tuesday Tax Take, we are looking at the other side of the equation: after tax dollars. While after tax contributions do not reduce your taxes today, they can offer powerful benefits in the future, especially when it comes to flexibility and tax free income later in life.
The Big Picture: Paying Taxes Now for Flexibility Later
After tax dollars are money that has already been taxed. Once taxes are paid, those dollars can be used or invested without worrying about additional tax on the original amount. In some cases, future growth and withdrawals can also be tax free.
- Tax Free Retirement Income Through Roth Accounts
The most common after tax strategy is saving through Roth retirement accounts, such as a Roth IRA or Roth 401(k). With Roth accounts:
- Contributions are made with after tax dollars
- Qualified withdrawals can be tax free
- Growth is never taxed if rules are followed
This can be extremely valuable in retirement, when tax rates and income needs may be uncertain.
- Paying Tax Now Can Be Cheaper Than Paying Later
After tax strategies can be especially attractive if you expect to be in a higher tax bracket in the future. For example, a younger worker early in their career may be taxed at a lower rate today than they expect later. Paying tax now on contributions may cost less than paying tax later after decades of growth. This is not a guarantee, but it is a common and reasonable planning consideration.
- Fewer Forced Withdrawals Later in Life
Traditional pre tax retirement accounts generally require required minimum distributions, which force taxable income whether you need the money or not. SECURE 2.0 eliminated lifetime required minimum distributions for Roth accounts in employer plans beginning in 2024. This gives Roth savers more control over timing and taxes. Benefits include:
- Greater tax planning flexibility
- Ability to leave money invested longer
- Potential advantages for heirs
- Greater Day to Day Flexibility
After tax dollars are generally easier to use. There are no eligibility rules, deadlines, or expense restrictions like those that apply to many pre tax benefit accounts. While pre tax accounts can be extremely valuable, after tax dollars provide simplicity and flexibility, especially when future spending needs are uncertain.
When After Tax Dollars Often Make Sense
After tax strategies are often appealing when:
- You expect higher income or tax rates later
- You want tax free income in retirement
- You value flexibility and control
- You want to diversify tax exposure across different account types
The Takeaway
Before tax and after tax dollars are not an either or decision. Many people benefit from using both, creating flexibility to manage taxes across different stages of life. The key is understanding what each option offers and choosing intentionally.
This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.
