Module 11 · Taxes
Tax-advantaged accounts around the world
How accounts such as ISAs, 401(k)s, NISA, the PEA and Slovenia's INR reduce or delay tax, the two main designs, and when fees and restrictions outweigh the tax benefit.
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In this lesson
- Explain the difference between 'tax relief now, tax later' and 'tax now, tax-free later'
- Name the main tax-advantaged accounts in several countries and their key limits
- Compare a traditional and a Roth-style account with numbers
- Judge when fees, lock-ins or limits cancel out a tax benefit
Hana, 33, has money to save for the long term. Her employer offers a pension plan with tax relief, her bank offers a tax-free investment account, and an article says “never pay more tax than you must”. Which should she choose, if any?
What a tax-advantaged account does
A is an account that reduces or delays the tax on what you earn inside it. Governments offer them to encourage long-term saving and pensions. There are two main designs:
- Tax relief now, tax later (often called traditional or “EET”: exempt contributions, exempt growth, taxed withdrawals). You pay in from untaxed income, growth is untaxed, and withdrawals are taxed. Good if your tax rate in retirement is lower than today’s. Examples: the US 401(k) and traditional IRA, and many pension plans.
- Tax now, tax-free later (the Roth or “TEE” design: taxed contributions, exempt growth, exempt withdrawals). You pay in from taxed income, and growth and withdrawals are tax-free. Good if your future rate is the same or higher, and gives flexibility. Examples: the Roth IRA, UK ISAs, Japan’s NISA.
Some systems use an allowance instead of an account, such as Germany’s yearly saver’s allowance.
Fees and rules can cancel the benefit
A tax-free label is not enough. Check the yearly fee, the contribution limit, the lock-in and the choice of investments.
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