Tax Implications of Retirement Accounts
Retirement accounts are any IRA, 401(k), 403(b) SEP IRA, simple IRA or other employer-sponsored retirement accounts – any type of pre-tax account.
You put money into them pre-tax and postpone the tax; you save the tax dollars now but have to pay them later when you make your withdrawals. That’s the first perceived benefit.
The second perceived benefit is that you get tax deferral on that money until you decide to take it out. Because the money is growing inside of a retirement account, you don’t pay any tax on the growth at all. Kind of nice, right? Many of you are putting into retirement accounts as much as possible because you want to save as much money in taxes as possible.
But ultimately – you still have to pay taxes on it. You’re just postponing paying it. When you start taking withdrawals later, you’re going to be in a smaller tax bracket so you’re going to pay fewer taxes – or so you think. But as a retirement planner for decades, I can tell you that’s just a theory that doesn’t work in practice. When people retire, they’re often making more money and are in a higher tax bracket than 15-20 years earlier.
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