Your Retirement Accounts and their Tax Impact
When taking income from your different retirement accounts, you’ll need to weigh the tax impact of each option and how that will affect the net amount you receive in your pocket. Here are a few common types of retirement accounts and how they are taxed:
Traditional 401(k)’s, 403(b)’s, IRAs:
- Contributions: money you put into these accounts are pre-tax, meaning, you receive the benefit of not paying tax on the income that goes into these accounts, whether through contributing right from your paycheck or receiving a deduction on your tax return.
- Growth: These grow tax-deferred, and you do not need to pay any taxes on them while the money grows in the account
- Withdrawals: Qualified withdrawals from these accounts are fully taxable as income, at whatever your tax rate is for that year. Must be 59 ½ to withdraw without penalty, besides for a few exceptions.
Roth 401(k)’s, 403(b)’s, IRAs:
- Contributions: money you put into these accounts are done after-tax, meaning you paid tax on the money before it went into the account.
- Growth: These grow tax-deferred, and you do not need to pay any taxes on them while the money grows in the account.
- Withdrawals: Qualified withdrawals from these accounts are fully tax free. Must be 59 ½ to withdraw without penalty, besides for a few exceptions.
Health Savings Accounts
- Contributions: money you put into these accounts, up to the allowed limit, are pre-tax, meaning, you receive the benefit of not paying tax on the income that goes into these accounts, whether through contributing right from your paycheck or receiving a deduction on your tax return.
- Growth: These grow tax-deferred, and you do not need to pay any taxes on them while the money grows in the account.
- Withdrawals: At any age withdrawals from these accounts are fully tax free if used for qualified medical expenses. Before you turn 65, if withdrawing for other non-qualified medical expenses, the draws are taxable AND incur a penalty. But after you turn age 65, you can withdraw from these accounts for any expenses penalty free (fully taxable though).
Taxable accounts (Brokerage or advisory accounts)
- Contributions: money you put into these accounts are after-tax dollars, typically from your checking or savings accounts.
- Growth: Each year, you will pay capital gains tax on any realized gains you have in the account from investment growth and performance. Realized gains are only recognized when the investment is sold. If you had a loss from selling those investments, you could capture a realized loss on that year’s tax return. Capital gains rates are more favorable at the moment than ordinary income rates.
- Withdrawals: Withdraws from the account are not taxed, aside from the fact you may need to sell an investment to take a withdrawal (which then incurs a capital gains tax).
Having options as to what account your retirement income can come from is ideal for a retirement scenario, so that all of these tax impacts can be combined together into a cohesive strategy. If you’d like help deciding how to draw your retirement income from your accounts, I’d love to help.
Article by: Kelsey Ponesse, CPA
Wealth Planning Advisor with Marshall & Sterling Wealth Advisors, Inc.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Marshall & Sterling Wealth Advisors, a Registered Investment Advisor. Marshall & Sterling Wealth Advisors and Marshall & Sterling Wealth Management are separate entities from LPL financial.