Aspire. Ascend. Achieve
22 Jul

How Taxes Affect Your Retirement Investments

Retirement Investments Affected by Taxes

Did you know that estate and income taxes can vary depending on which retirement investment(s) you choose? In fact, they can vary substantially, so we strongly encourage you to learn as much as possible about your retirement investments and their tax implications. To help, we break it down for you below:

Income Taxes and Roth IRAs

One of the biggest advantages of a Roth IRA is that you are not required to start withdrawing money from the account when you hit the age of 70. In fact,2e1ax_simplistic_entry_iStock_000016283874Medium_030315_crop you are never required to withdraw money from a Roth IRA, no matter your age. You can even leave the entire retirement account for your beneficiaries if you so choose.

On the other hand, if you want to withdraw money from the account, you can do so free of income tax when you are 59 ½ and have owned the Roth IRA for five or more years. This includes both principal and earnings. If you are under the age of 59 ½, you can withdraw money from your Roth IRA without being taxed if you withdraw principal and not earnings.

Income Taxes and Retirement Accounts

When it comes to retirement accounts, some of the most common ones out there are 401(k), 403(b) and non-Roth IRA. No matter your age, if you withdraw money from one of these accounts, you will be subject to income taxes. The same can be said for interest on CDs and stock dividends. The following is some important information about withdrawing from these types of retirement accounts:

  • Beginning at the age of 59 ½, you can withdraw from these accounts without facing any penalties. You will only need to pay income taxes on the retirement income you withdraw. If you withdraw from the accounts prior to the age of 59 ½, you will be hit with a 10 percent early withdrawal penalty. You are able to control the amount of money you withdraw from these accounts each year until you reach the age of 70, which will help you control how much income tax you owe each year.
  • When you hit the age of 70, you are required to take withdraws, or required minimum distributions, every year from almost all employer retirement accounts and any non-Roth IRAs. The IRS requires that you withdraw a set amount of money each year based on your age. Should you not take out the required amount, you could face a 50 percent penalty on the remaining amount of money still to be withdrawn from your accounts.

Estate Taxes and Retirement Accounts

You are legally allowed to include all of your retirement accounts; including Roth IRAs, traditional IRAs and employer plans, in your estate planning account. When these accounts are included in your estate planning, it is possible that they could be subjected to estate taxes. Each year, the IRS sets a limit for how much money can be in an estate before it is subject to estate taxes. This means that if you keep the total amount under the limit set by the IRS, you will prevent your family from paying a high amount of estate taxes.

Do you have questions about your retirement planning? If so, please contact us today or by phone at 732-381-8887.

About the Author

James Gementgis, CPA James Gementgis, CPA
James F. Gementgis, CPA, joined Spire Group PC in 2009 as a principal and has over 30 years experience in providing accounting, tax and consulting services to a vast range of small to mid-size business industries. Mr. Gementgis also has extensive experience in individual, fiduciary tax planning and preparation. When not working, Mr. Gementgis enjoys watching sports, relaxing by a pool and going on vacation with his family.

Comments are closed.

Want to work with us? Reach out to get started

Contact Us