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| The Tax Advantages of a DC Retirement Plan: Get Even with the IRS |
| Your DC plan offers you significant tax advantages. First, all the interest and capital gains your DC account earns are tax-deferred. This means you don't have to pay taxes on that money until you begin withdrawing it. Instead, more of your money stays invested, growing and growing until you draw on it in retirement (in other words, you–rather than Uncle Sam–get to earn interest on the taxable portion of your contributions). Over time, these tax breaks can add up to a lot of extra money in your account. |
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| If you are contributing to your DC plan, you probably enjoy another tax benefit. Specifically, investing in your plan may actually lower your income taxes. With a 401(k), for example, the money you invest is deducted right from your paycheck, so it isn't counted as taxable income by the IRS. The more you contribute to your 401(k), the less you pay in income taxes. |
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| Although tax-deferred accounts offer significant advantages over taxable accounts, they usually have one minor drawback: You usually get penalized for withdrawing money too early. But since these accounts are designed to fund your retirement, withdrawing before age 59.5 shouldn't be an issue. |
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Questions & Answers | |
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| Not paying taxes on the money you earn in your DC plan until you retire means: | |||
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