(207) 797-5680 x101

Scott Kehoe CLU, ChFC

Retirement

Paying Tax Later Doesn't Always Mean Paying Less

How 401(k)s are taxed

One of the most important things to remember about your 401(k) is this: The balance you see isn’t how much you’ll have available for retirement. The reason? Taxes.

Tax breaks on contributions

As a retirement plan, 401(k)s are popular because they are tax-advantaged in the short term. Your contributions during the year are excluded from your earnings and will only be taxed on withdrawal, meaning you can lower your tax bill now and not worry about it for years to come. 

Many employers offer a 401(k) match as an added benefit, too. They’ll match your actual contributions up to a pre-determined limit by putting the money into your retirement account.

Sounds good so far. But what happens in the long term, when you withdraw funds from the plan?

Taxes on withdrawals

Distribution from your 401(k) is taxed as ordinary income, like earnings from employment. Your tax bill will depend on your age and income level. While many people expect to be in a lower tax bracket by the time they retire, this doesn’t always happen, particularly as retirees typically have less deductions. 

Taking 401(k) distributions could push you into a bracket where your Social Security benefits become taxable. If your income is high enough, your monthly Medicare premiums could also go up. Unfortunately, IRS prescribes minimum distribution amounts once you reach 72 — so you’ll have limited control over how much to withdraw.

The bottom line? 401(k)s have pros and cons. There could be more tax efficient ways for you to save for retirement. Talk to your financial professional to find out more.

Pub11500  2022-136198 Exp. 4/24

Share |
 

Related Content

3 Tips to Plan Your Exit Strategy

3 Tips to Plan Your Exit Strategy

Be realistic about the sale of your business, get it ready for the sale and make sure key employees are on board

Millennial Money Myths: Buying a Car is Better Than Leasing

Millennial Money Myths: Buying a Car is Better Than Leasing

During difficult economic times, it is even more critical to be smart about where you spend your money. And it is essential to do your homework so...

Navigating the Ups and Downs of Business Cash Flow

Navigating the Ups and Downs of Business Cash Flow

You’re at the amusement park, waiting to board the roller coaster. You can see the whole track as you stand in line. Peaks that seem to pierce the clouds.