IRS Taxes and Your Retirement Funds
Saving for your retirement is one of the most important disciplines of your work life.
The aim of saving up is to ensure that you maintain - if not improve - your lifestyle after retirement even after adjusting for inflation and increased health costs.
With proper financial planning, one can invest wisely and reap this rewarding sunset life.
However, while doing your retirement planning, it is important that you factor in the state and IRS taxes.
The information below will help you understand how IRS taxes affect your retirement funds: Traditional Retirement Accounts Traditional pension accounts including the employer managed traditional 401(k) accounts and the traditional Individual Retirement Accounts (IRA) enable taxpayers to save limited funds into a retirement account tax free.
The funds in the traditional accounts grow tax deferred but the taxpayer is taxed upon withdrawal.
Withdrawal from these accounts before the age of 70.
5 years will attract a penalty and the funds will be taxed at the individuals highest tax rate.
Upon attaining the age of retirement (70.
5), the individual is required to receive a certain minimum retirement distribution referred to as the Required Minimum Distribution (RMD).
This amount is taxed at the taxpayer's tax bracket at the time of receipt.
Traditional retirement accounts are ideal for individuals whose work-life tax bracket is high and therefore, taxation at a lower retirement tax rate will save on taxes.
Roth Retirement Accounts Roth retirement accounts work in the opposite way when compared to traditional accounts.
Roth IRA and Roth 401 (k) accounts have the taxpayer save up after tax funds.
The funds in the Roth account grow tax free and the distribution is also tax free.
This retirement accounts are ideal for individuals who want to avoid paying tax on their investment growth and who are willing to pay tax on the retirement funds as they contribute.
Social Security Social Security is the pension fund managed by the federal government.
Depending on the amount of income the taxpayer makes during his or her retirement, a retired citizen can be taxed up to 85% of his or her Social Security distribution.
To determine the amount of Social Security to be taxed, the IRS considers ones Adjusted Gross Income (AGI), tax free incomes such as distributions from Roth accounts and interest from tax free investments such as municipality bonds, and the amount of Social Security distribution.
If the summation of the AGI, tax free incomes and 50% of the Social Security distribution is above $34,000 for single filers or $44,000 for joint filers, then the retired individual will have his or her Social Security taxed.
The percentage of the Social Security to be taxed depends on the retirement income summation -as explained above.
Other Investments If a retired individual has other investments that give him or her incomes such as rental incomes or mutual fund incomes, then such incomes will be taxed accordingly.
Tax free incomes such as municipality bonds may also affect taxation as it contributes to the tax rate to be applied on the Social Security distribution.
Investment advisors therefore advise retirees to put their funds in products that do not count for Social Security taxation such as annuity.
The aim of saving up is to ensure that you maintain - if not improve - your lifestyle after retirement even after adjusting for inflation and increased health costs.
With proper financial planning, one can invest wisely and reap this rewarding sunset life.
However, while doing your retirement planning, it is important that you factor in the state and IRS taxes.
The information below will help you understand how IRS taxes affect your retirement funds: Traditional Retirement Accounts Traditional pension accounts including the employer managed traditional 401(k) accounts and the traditional Individual Retirement Accounts (IRA) enable taxpayers to save limited funds into a retirement account tax free.
The funds in the traditional accounts grow tax deferred but the taxpayer is taxed upon withdrawal.
Withdrawal from these accounts before the age of 70.
5 years will attract a penalty and the funds will be taxed at the individuals highest tax rate.
Upon attaining the age of retirement (70.
5), the individual is required to receive a certain minimum retirement distribution referred to as the Required Minimum Distribution (RMD).
This amount is taxed at the taxpayer's tax bracket at the time of receipt.
Traditional retirement accounts are ideal for individuals whose work-life tax bracket is high and therefore, taxation at a lower retirement tax rate will save on taxes.
Roth Retirement Accounts Roth retirement accounts work in the opposite way when compared to traditional accounts.
Roth IRA and Roth 401 (k) accounts have the taxpayer save up after tax funds.
The funds in the Roth account grow tax free and the distribution is also tax free.
This retirement accounts are ideal for individuals who want to avoid paying tax on their investment growth and who are willing to pay tax on the retirement funds as they contribute.
Social Security Social Security is the pension fund managed by the federal government.
Depending on the amount of income the taxpayer makes during his or her retirement, a retired citizen can be taxed up to 85% of his or her Social Security distribution.
To determine the amount of Social Security to be taxed, the IRS considers ones Adjusted Gross Income (AGI), tax free incomes such as distributions from Roth accounts and interest from tax free investments such as municipality bonds, and the amount of Social Security distribution.
If the summation of the AGI, tax free incomes and 50% of the Social Security distribution is above $34,000 for single filers or $44,000 for joint filers, then the retired individual will have his or her Social Security taxed.
The percentage of the Social Security to be taxed depends on the retirement income summation -as explained above.
Other Investments If a retired individual has other investments that give him or her incomes such as rental incomes or mutual fund incomes, then such incomes will be taxed accordingly.
Tax free incomes such as municipality bonds may also affect taxation as it contributes to the tax rate to be applied on the Social Security distribution.
Investment advisors therefore advise retirees to put their funds in products that do not count for Social Security taxation such as annuity.
