It actually is inspiring and great to see that the amount is actually adding up to a large savings; especially if it is with regards to your retirement savings. However, what happens when you retire and you start drawing money from the IRA or the 401k accounts? These in some cases can be taxable. In fact, the taxes which you may owe can manage to surprise you, if the amount owed is considered. Just as there are different forms of retirement accounts, there similarly are different types of tax implications too.
Tax implications of retirement savings
The tax liabilities do not stop even when you retire. Pension income is taxable and similarly the savings you have made under the retirement accounts too are taxable.
Retirement account types
There are various types of retirement accounts which are available for those who are trying to save some money for the retirement. Some of these are:
401K– When you go on to make the withdrawals after the retirements, you are required to pay taxes with regards to the original contributions and the earnings made on the account or the accounts. On the other hand, if you make any early withdrawals before you reach the age of 59 1/2, you may have to pay penalty amounting to 10% of the withdrawn amount, and the taxes too in addition.
IRA– With regards to the IRA, you are allowed to save up to $5,000 or may be $6,000, only if you have reached the age of 50 or more than that. This is with regards to every year. There mainly are two options available under the IRA accounts. One is the traditional IRA and the other is the Roth IRA. Based on the type of account you are going to use or are using, there are differences with regards to the tax implications – irrespective of the status. This means may it be the contributions or the withdrawals, taxes may be charged on the same. However, after you turn 59 1/2, you will have the option to withdraw money without having to pay any penalties.
Traditional IRA – In case of the traditional IRA, with the deposition of the money into the account, the taxable income is lowered. When the year ends, you will have the option to deduct the amount which you had contributed, thereby helping you get the tax break on the same. However, when you will retire and go on to withdraw money from the account, you would be required to make tax payments on that same.
Roth IRA – If it’s the Roth IRA, it is the actual opposite of the traditional IRA account. You would not have the option to get any kind of immediate tax breaks during the time of the contributions. However, things change after you retirement. Then you wouldn’t be held liable to pay any taxes even if you withdraw money from the account. This is because, as per the tax requirements you would have already paid the taxes. All of the additional earnings, in general are considered to be tax free. You can even withdraw the contributions without having to pay any sort of tax related penalty.
Therefore, just as you are required to get debt consolidation advice before consolidating your debts, it is equally important for you to get retirement advice, with regards to the savings and the taxes too at the same time.