Benefits Plans - roth savings Plans - Taxes: pay now or pay later
Example for illustrative purposes only: John has $10,000 to save for retirement for 2013 and will not make any further contributions. He earns 6% per year for 20 years and takes a distribution at age 60 with different tax results depending on how the contribution was initially made.
- The entire $10,000 is invested and grows to $32,701.
- The tax bracket at distribution is 35% based on being in his peak earnings years and/or having substantial taxable distributions to replace his earnings to sustain his standard of living in retirement.
- Taxes amount to $11,445 and leaving him with $21,256 in net proceeds.
- The $7,200 is invested after paying $2,800 in taxes (28%) on the $10,000 in 2013.
- The $7,200 grows to $23,091 but is completely tax free, providing a higher net proceed than investing with tax-deferred contributions.
Summary: In this example the tax rate in retirement is higher than it is at the time the contribution is made. Therefore, the after-tax Roth provides a greater net benefit.
This information is based on the University of Michigan’s current understanding of highly-complex Internal Revenue Code (IRC) and U.S. Treasury Department regulations. It is provided for general informational purposes only. The University of Michigan does not provide (nor is this intended to constitute) tax, legal, accounting, estate planning or investment advice. It is the responsibility of the individual to address questions or concerns to a qualified professional.
The University of Michigan in its sole discretion may modify, amend, or terminate the benefits provided with respect to any individual receiving benefits, including active employees, retirees, and their dependents. Although the university has elected to provide these benefits this year, no individual has a vested right to any of the benefits provided. Nothing in these materials gives any individual the right to continued benefits beyond the time the university modifies, amends, or terminates the benefit. Anyone seeking or accepting any of the benefits provided will be deemed to have accepted the terms of the benefits programs and the university's right to modify, amend or terminate them.