13 Dec Tax status of your retirement savings
The first step in this process is to analyze the type and tax status of your retirement savings. For this purpose, divide your accounts into three categories:
- Taxed Later: Traditional IRAs, 403(b), and 401(k)s are types of savings accounts that give you a tax deduction at the time you contribute. Those savings will be taxed later in retirement when you withdraw them – and the amount you pay taxes on includes both your contributions and the growth they accumulated over the years.
- Taxed Now: Taxable savings are held in brokerage accounts, mutual funds, banks, etc. In other words, these are savings that you put in investment or savings accounts that you already paid taxes on but received no deductions. Taxes will be due on these savings if you realize capital gains through a sale or receive interest or dividends.
- Taxed never: You will never pay taxes on qualified withdrawals from your Roth IRAs. Taxes will never be due on those funds because you already paid them when you converted a traditional IRA to a Roth or contributed to the Roth. One thing to keep in mind: You can withdraw your contributions to your Roth IRA at any time without paying taxes on them, but in order to withdraw the gains on your investments tax-free and penalty-free, you must be at least 59½ and have owned a Roth IRA for at least five years, with a few exceptions, such as first-time home purchase and paying for college expenses.
Original content by clergyfinancial.com. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.