When you put money into a retirement account, it matters whether the funds come before taxes or after taxes. An after-tax contribution means you have already paid taxes on the money, i.e. the funds have been counted for income tax purposes in the year you received them. When you take that money out, decades later, it won't be taxed. That is, when you put after-tax funds into retirement, you don't have to pay taxes again down the road when you use them in retirement (though you might have to pay taxes on any investment gains you make).
An alternative world of deferred tax savings exists, essentially called a pre-tax investment. These tax-deferred savings vehicles include things like 401(k)s and IRAs which come in a range of flavors. These forms of investments allow you to avoid taxes now, though you will have to pay taxes on them when you take money out during your retirement years. The benefit is that you have more money to invest, because the government hasn't taken a bite out of your wallet yet. As this grows over time, the extra funds should multiply, leaving you better off in the end, even though you have to eventually pay the taxes down the road.
The rationale is that, in your peak earnings years, you're paying high marginal tax rates...maybe 30-35-40 percent. When you retire, you'll likely be paying a lower tax rate as you withdraw (and then pay taxes on) your IRA and 401k savings vehicles.
The big idea here: When you make an after-tax contribution to a savings for retirement vehicle, the tax is thus already paid. You don't pay it again.
Wasn't that a line from Casablanca? "Pay it again, Sam"...or something like that?
Related or Semi-related Video
Finance: What is contribution margin?12 Views
Finance a la shmoop... what is contribution margin, well, shmoop has spent a fortune
building the oh so fine content you digest and then mostly for free and you [Girl watching Shmoop videos]
could pay us if you wanted to..For years we've made no operating profit choosing
instead to roll any excess cash we found in our cigar boxes into building more
content so while our operating margins ie the cost of running the entire
business paying our writers, our clowns, our rent, our cloud storage facilities the [Clown bouncing on the spot]
office jester we have on retainer permanently to entertain the writers
have been low or nearly zero our contribution margins are really high
that is our cost of serving another thousand pages which you view hungrily
clicking on our ads thank you very much that cost to us is well something less [Person holding half a penny]
than a penny but we sell it to advertisers for a thousand page views
and about three bucks a unit there thousand pages for three bucks what a
deal so the contribution margin of that additional n plus one unit of our
product a thousand page views is extremely high like $2.99 divided by
three dollars or well over 99% contribution margin those are
our contribution margins here at Shmoop, very very high and not all companies [Man discussing contribution margins]
have such high contribution margins our sister company robot-date-eat-pray-
love which manufactures emotionally deep robots designed to take the place of [Emotional robot walking with a woman]
well you know special friends well they sell their robots for 15 grand each
but their cost of building that robots really high like 12 grand each no matter
how many robots they make so RDEPL carries a contribution margin of just 15
minus 12 or 3 grand / 15 grand or about 20 percent sorry all these numbers may
sound a bit tedious but if you're on a date with the robot they make for some
scintillating conversation [Girl sitting with robot on a date]
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