Tax Law for Retirement Accounts

We all dream of the day when we don’t have to work anymore. You’ll have more time to spend with your family and friends, travel the world, and start that hobby you always talked about. But even in retirement, you can’t escape the IRS. In this article, we’ll cover the various laws of taxation as you save for retirement and withdrawal money from those accounts.

IRAs and 401(k) plans

Hopefully, you have enough disposable income to invest some of that money into an individual retirement account (IRA) or 401(k) plan. Investing into a traditional IRA or 401(k) is actually tax deductible the year you invest, meaning that investments you make now will reduce your taxable income in the year that you make them. However, all withdrawals are taxed at ordinary income tax rates, including gains. This means that the lower capital gains tax rates don’t apply in this situation.

One alternative to these plans are Roth IRAs and Roth 401(k)s. Unlike the traditional variants of these accounts, investments you make now are not tax deductible. The benefit of these accounts is that after five years, no withdrawals are subject to any taxation, including your gains.

Both of these accounts are tax sheltered while they grow. You can trade stocks within the accounts without paying capital gains. Keep in mind that you do have to invest any funds you put into these retirement accounts, as they usually aren’t invested automatically.

Other Retirement Income

Even though you paid a Social Security Tax your whole life to the program, up to 85% of Social Security benefits can be taxed by the IRS at ordinary income tax rates. The same applies to pensions, except that 100% of pension income is taxable.

If you maintain any investments in interest-bearing accounts or receive dividend payments, these are taxable too. Selling assets like stocks or your home will also be taxed, but these are likely taxed at the lower capital gains tax rate.

Conclusion

You have a right to an attorney who can represent you before the IRS. If you feel like the IRS has failed to uphold your rights, call Cornerstone Law Firm. The experienced tax attorneys can fight for your rights in court.