One of my favorite tax breaks is contributing to a tax-deferred account, like a Traditional IRA, SEP-IRA or SIMPLE IRA. Contributions to these accounts lower your taxes when the contribution is made, and allow you to defer (postpone) owing taxes on those contributions until retirement.
But I fear in the past I’ve given this same advice on my blog without thoroughly explaining how and why this actually works.
In today’s post, I’d like to answer two questions:
How exactly does contributing to a retirement account mean lower taxes today?
Why does that matter if taxes are still owed later?