Socking away all your money in to tax deferred plans such as 401(k)s, 403(b)s, 457 plans, and deductible IRAs can be good – to a point. That point ends when you create a situation where all your financial assets are in a tax deductible bucket. This can cause problems once you’re retired because of the way retirement income is taxed. (See Retirement Taxes - Frequently Asked Questions for additional details.
Taxes on Withdrawals
When you withdraw money from tax deferred accounts, it will all be taxed as ordinary income in the calendar year in which you take the withdrawal.
If you need extra funds for an extended vacation, new car purchase or to help out a family member, the excess funds withdrawn may bump you into a higher tax bracket.
Better to have after tax buckets to draw from, as well as tax deferred buckets.
As you near retirement, build a balance of after tax and pre tax money. Even if you are foregoing some deductions now, you will be creating financial flexibility that may be useful once you are retired.
