The Retirement Guru says…

that the IRS is sort of like a boyfriend or girlfriend that you’re in a fight with. Anything you do will get used against you, if not now then later. The good news with the IRS is that you get to pick your battles.

The problem is, American citizens aren’t picking their battles correctly.

The IRS reports that 91% of us will pay too much in taxes this year. Do you think they’re going to correct this for you? Nope. That’s not what they get paid to do. They get paid to collect, and that’s it.

When you save money, they want taxes, either now or later. They really don’t care which way it works out. It’s your choice. That’s the difference between Roth IRA vs. Traditional IRA. With a Roth IRA, you pay tax on your income you earn, and then you contribute to your account. The Traditional IRA works in the same way, except you can deduct on your tax return any contributions you made this year (tax deduction now). Which one you go with depends on your tax bracket, in other words how broke you are. For more info on the difference between a tax deduction and a tax credit, click here.

With the Roth IRA, you take money from your checking account (which you’ve had to pay income tax on when you got paid) and put it into a Roth. You’ll never pay taxes on that money again. Ever (unless you take it out early). Fun, eh? Typically if you’re in the lower income bracket (under $32,000 a year in income), that means you don’t pay much in taxes anyway. Little taxes now, no taxes later! It’s one of the few ways the government rewards us poor college students, so milk that cow while it’s still moo’in. Another fun thing about the Roth is that all gains are tax-free. Say you buy some stock that pays dividends. When you receive those dividends, they are not taxed… at all. If the stock price increases from $14 to $18, you have a $4 capital gain… tax free.

With a Traditional IRA, you do the opposite. You put money into the plan, and you tell the IRS that you weren’t supposed to pay taxes on that money. For the typical person, it means a higher tax deduction when you file, which can potentially lead to a refund check. The con? Pay income taxes when you take the money out (and a penalty if it comes out early).

So, how does a 401(k) play into all this? It’s essentially the same thing as a Traditional IRA, but it’s much easier to manage. A 401(k) has the money coming directly out of your paycheck and into an account (the account typically doesn’t cost you a penny). Plus, most companies give you free money just to save, such as a company match. This match isn’t because they love you, but because executives are only allowed to contribute a certain percentage more than non-executives. So, the executives literally throw money at you just to start saving, so that they line their own pockets. It’s money for everyone, except for the IRS (pretty cool, eh?)

If you’re lucky, the government even gives you extra money (in the form of a tax deduction, which means you pay less taxes or even get a refund check) just for having the right combination of being poor and saving money. Learn more.

If you’re making what most college students make, you’ll be rewarded heavily for saving money, and can potentially get up to 50% of that back. Click here to see if you would qualify. That doesn’t even count the inital tax savings, nor does it count the free money in a company match. In dollar amounts, if the company matches 4% of your income in your 401(k), you just got $1,200 from them plus any credited amount from the government, all for saving $2,000. Your total savings are a lot more than what meets the eye.

Like a CPA once told me, “Retirement accounts are a goldmine.”

So get out there and start saving money. Back to investing…

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