Tax-Free vs. Tax-Deferred: Choosing the Right Plan for Your Retirement Goals
When planning for retirement, knowing how taxes impact your savings is crucial. Two powerful options, the 401(k) and the 702s Plan, offer distinct tax advantages: tax-deferred growth with a 401(k) and tax-free growth with the 702s Plan.
The Seed vs. Harvest Tax Approach
702s Plan - "Tax on the Seed": You pay taxes upfront on contributions, so your savings grow tax-free, and withdrawals in retirement are also tax-free. This strategy is ideal if you’re looking for tax-free access in retirement and stability against future tax hikes.
401(k) - "Tax on the Harvest": Contributions reduce your taxable income now, but withdrawals are taxed in retirement. This is beneficial if you expect to be in a lower tax bracket after retiring.
Key Benefits Comparison
Tax Impact
702s Plan: Tax-free growth and withdrawals.
401(k): Tax-deferred growth, but withdrawals are taxable.
Contribution Limits
702s Plan: Flexible, no fixed limits.
401(k): Capped at $22,500 for 2024 (plus $7,500 catch-up if over 50).
Withdrawal Flexibility
702s Plan: Withdraw tax-free loans anytime without penalties.
401(k): Withdrawals before 59½ are penalized, and RMDs start at age 73.
Estate Planning
702s Plan: Includes a tax-free death benefit.
401(k): Inherited funds are taxable for beneficiaries.
Choosing the Right Fit for Your Goals
High Tax Bracket in Retirement? Consider the 702s Plan for tax-free withdrawals.
Need Immediate Tax Savings? Opt for a 401(k) to reduce taxable income now.
Looking for Contribution Flexibility? The 702s Plan offers more freedom with no caps.
Employer Match? Maximize your 401(k) contributions to benefit from “free money.”
Final Thoughts
Choosing between the 702s Plan and a 401(k) depends on your tax strategy and retirement goals. Many find that combining both—capitalizing on employer matching with a 401(k) and the tax-free benefits of the 702s Plan—creates a balanced, tax-efficient retirement plan.
For more guidance, visit W.H. STEINER to explore these options in-depth and optimize your retirement strategy.
Learn more by visiting the W.H. STEINER website.
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