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Originally Posted by CJsoccerchic
So a traditional IRA is pre-tax savings and then after a certain age, you have to pay taxes on the money you put in when you were younger as well as the interest that it has earned?
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Maybe an example would be helpful. Let's say you have $1,000 of pre-tax money to contribute, and let's say it will grow to 10 times that by the time you're ready to take it out. Let's also assume your effective tax rate is 20% both now and in the future.
In a 401k or traditional IRA, your money goes in untaxed so you deposit the full $1,000. It grows to $10,000. Then you withdraw it, paying $2,000 in taxes, for a net return of $8,000.
In a Roth IRA, you're taxed up front, so you deposit $800. It grows to $8,000. You can withdraw that amount without paying tax on it.