It’s the most wonderful time of the year! Well, if you’re a tax professional, it is.
For many of us, taxes are a burdensome, potentially stressful part of the year. If you’re nearing retirement, maybe it’s time you started to consider how your accounts could be affected by tax season. Regardless if you have a pension, 401(k), another employer-sponsored account, or an IRA, taxes play a large role in our retirement income planning.
Maybe you’re wondering if your retirement portfolio is up to snuff when it comes to taxes. In this first installment of our two-part series on retirement and taxes, we’ll be discussing the basics of pre-tax (or tax-deferred) and after-tax retirement accounts.
Retirement accounts that are tax-deferred allow you to put away those dollars now but will generally be taxed as ordinary income upon withdrawal in retirement. Some of the more common accounts you may come across are 401(k)s and traditional IRAs.
There are advantages to making pre-tax contributions. Generally, pre-tax contributions can help lower your taxable income. An additional bonus to contributing pre-tax dollars is you’ll be adding more into your account than your after-tax dollars.
There are certain account types that can side-step those taxes in the future by utilizing after-tax dollars as contributions to your account. These are typically used by younger investors and savers. Some popular accounts include Roth IRAs and Roth 401(k)s.
While you won’t have the pre-tax benefit as you would with your employer-sponsored 401(k), you won’t have to worry about being taxed in the future on qualified withdrawals — the tax on those dollars has already been paid, and that money is yours to generate tax-free income in retirement.
Maybe you’re wondering if you’d benefit more from a tax-deferred or an after-tax account for retirement. It all depends on your personal goals, needs, and financial situation — no two financial situations or retirement plans are exactly the same. The most important thing to bear in mind is you should stay up to date on changes in tax laws that could affect your retirement strategy.
If you’d like to learn more about tax-deferred and after-tax retirement accounts, sign up today for an American Retirement Institute class in your area to hear from one of our financial educators.
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