Are all of your savings for retirement in traditional 401(k)s and individual retirement arrangements (IRAs)? If so, you could face significant required minimum distributions at retirement age. Keep in mind, these distributions have the potential to bump you into a higher tax bracket. To add tax diversification and flexibility to your portfolio, one must consider saving for retirement in accounts with different types of taxation regulations. These types of accounts include: traditional retirement accounts, Roth accounts and taxable investment or savings accounts.
Below is information which should help you form a solid strategy to fit your needs upon retirement. Fully understanding how distributions at retirement age are taxed (or not) can exponentially increase your success in living the life you desire when you retire.
Traditional 401(k)s and IRAs
Contributions to traditional 401(k)s and IRAs are excluded from your current income. Thus, you don’t have to pay taxes on these investment funds until you take distributions, presumably in retirement.
Roth 401(k)s and Roth IRAs
Roth account contributions are made with after-tax dollars. Withdrawals in retirement from Roth accounts are tax-free (assuming that the account is at least five years old). Additionally, distributions from Roth accounts aren’t required at any age, so you have the flexibility to take the money out when you need it without tax consequences. One may even leave the money in the account for later in retirement or leave it to their heirs.
Regular savings and investment accounts typically require you to pay taxes on the gains in the account each year, and there are no tax perks for contributing. However, these accounts are also the most accessible for spending or emergencies, and there aren’t penalties for withdrawing your money before a certain age.
To find out which account would be best for you and , or to start diversifying your retirement plans using self-directed accounts, call Midland IRA at 239-333-1032 or visit www.MidlandIRA.com.