US. Why tax reform could take away some of the benefits of retirement saving
Retirement saving in typical employer plans – both defined benefit pension and 401(k) plans – is tax advantaged because the government taxes neither the original contribution nor the investment returns until they are withdrawn as benefits at retirement.
If the saving were done outside a plan, the individual would first be required to pay tax on their earnings and then on the returns from the portion of those earnings invested. Deferring taxes on the original contribution and on the investment earnings is equivalent to receiving an interest-free loan from the Treasury for the amount of taxes due, allowing the individual to accumulate returns on money that they would otherwise have paid to the government.
Under a Roth 401(k), initial contributions are not deductible, but earnings accrue tax-free and no tax is paid when the money is withdrawn. Although the traditional and Roth 401(k)s may sound quite different, in fact they offer virtually identical tax benefits.
Full Content: Market Watch
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