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Assume you asked your favorite AI learning tool Is a dollar contributed to a Roth 4 0 1 k equivalent to a dollar contributed to
Assume you asked your favorite AI learning tool Is a dollar contributed to a Roth k equivalent to a dollar contributed to a traditional k and the AI tool responded as follows:
No a dollar contributed to a Roth k is not equal to a dollar contributed to a traditional k after accounting for taxes. The main difference between these two types of retirement accounts is how they are taxed, which affects the aftertax value of your contributions. Here's a breakdown of the differences:
Roth k:
Contributions: When you contribute to a Roth k you use aftertax dollars. This means that you've already paid income tax on the money you contribute.
Tax Treatment of Earnings: The earnings and growth in your Roth k account are taxfree. This means that when you withdraw money in retirement, both your contributions and the earnings they have generated are generally taxfree, assuming you meet certain requirements eg you've had the account for at least five years and are age or older
Traditional k:
Contributions: Contributions to a traditional k are made with pretax dollars. This means that the money you contribute is deducted from your taxable income for the year in which you make the contribution. As a result, you get an immediate tax benefit because your taxable income is reduced.
Tax Treatment of Earnings: In a traditional k your contributions and any investment gains grow taxdeferred. You don't pay taxes on them until you withdraw the money in retirement. When you make withdrawals in retirement, they are subject to ordinary income tax at your thenapplicable tax rates.
In summary, when you contribute a dollar to a Roth k you've already paid income tax on that dollar, and the future withdrawals are generally taxfree. When you contribute a dollar to a traditional k you get a tax deduction upfront, but you'll pay income tax on both your contributions and the earnings when you withdraw them in retirement.
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