Would you rather pay on the seed or the harvest?
The advantage of paying on the seed is you know what the price will be. The disadvantage of paying on the harvest is the uncertainty of the growth of the harvest.
This concept translates to the difference between tax-deferred accounts (IRAs & 401ks) and tax-free accounts (Roth IRAs and Roth 401ks).
Under the tax-deferred plan you are choosing to pay on the harvest. The money in that account is growing without any tax burden until distributions begin.
The risk a tax-deferred investor is faced with is the uncertainty of the future tax rates and the impact of those taxes on the final value of the account when the distributions eventually begin.
In the tax-efficient scenario, you are paying up front on the seed. This is the taxable contribution you make to the account. As a tax efficient investor, you are protected from paying any future tax on the growth of your money.
With that being said…What sounds better?
Paying an initial fee on the seed and enjoying free growth or taking the risk of uncertainty and paying on all growth when the harvest is over?
The difference between TAX DEFERRED accounts and TAX FREE accounts
Corey Shevlin
Corey serves as an investment adviser representative and handles the investment related administration for The Lynch Financial Group. He currently holds his Series 65, Life and Health Insurance licenses. He attended the University of Delaware and graduated with a Bachelor’s degree in Political Science and Criminal Justice in 2019.