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Is that true when you withdraw your money at retirement that you pay less tax for a traditional IRA than a 401(k)?
The tax rates are the same, but the amount of money that is taxed may be different depending on whether your made pre-tax or after-tax contributions.
The great thing about traditional IRAs and 401(k)s is that the earnings are tax-deferred. You don't have to pay taxes on dividends, capital-gains distributions or profits when you sell the investments as long as you don't withdraw the money from the account. When you finally do take the money in retirement, it is taxed at your income-tax rate, which can be from 10% to 35% depending on your income. After you retire, your income-tax rate is likely to be lower than it was when you were working.
But the portion of your withdrawals that is taxed may be different for your 401(k) than it is for your traditional IRA. If you've only made pre-tax contributions to the account -- which is the case for many 401(k) participants -- then the entire amount you withdraw will be taxed. But if you've made any non-deductible contributions -- common for IRA participants with income above the cut-off for deductibility -- then you'll owe taxes only on the earnings from those contributions, but not the contributions themselves.
If you withdraw money from several traditional IRAs to which you made both tax-deductible and non-deductible contributions, then the portion that escapes taxes is based on the ratio of non-deductible contributions to the total balance in all of your IRAs. See The Taxing Side of IRA Conversions for more information.
And if you have any Roth IRAs, the tax calculation becomes much easier. Your Roth withdrawals are 100% tax-free as long as you're at least age 59½ and have had a Roth for at least five years.
For more information about retirement-savings withdrawals, see How to Tap Your Retirement Accounts and Planning Your Retirement Tax Strategy.
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POSTED BY: retiree (May 09, 2008 02:40 PM)
If you take a withdrawal from a company plan and you are 55 and retired, you are taxed at your income rate, but do not pay the 10% penlty. if you put it in a IRA the age is 59 1/2. Wise to make your withdrawal before rolling it over to a IRA. This is a mistake that many make.
POSTED BY: JD (June 28, 2008 03:31 PM)
Common fallacy, and a big mistake. Your income tax rate is likely to be much higher when you retire than it is now.
Two reasons:
First, tax rates historically go up, and as our country becomes more socialist this is sure to continue.
Second, when you are retired, you have no more deductions. Your kids are gone, your house is probably paid off, you have no pre-tax retirement account contributions, etc. You may have lower gross income, but without deductions, your taxable income is much higher.
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