The amount of tax you owe at retirement depends not only on your income, but also on the type of your retirement plan and the timing of your withdrawals; you’ll want to consider retirement strategies that provide tax-deferred growth and tax efficiency.
With qualified retirement plans that provide tax deferred accumulation, such as 401(k)s and traditional IRAs, the money you contribute to the plan is pre-tax, meaning it is not taxed until you make a withdrawal, often years later. In addition, any growth or gain is also tax deferred.
Distributions (i.e., mandatory withdrawals) from such qualified plans will, in most cases, begin by April 1st of the year after you turn 70½. The money you receive from distributions is always considered regular (or, in IRS terms, “ordinary”) income and is taxed at a standard rate. Should you wish to withdraw cash from your retirement plan early (before age 59½), you may be subject to an additional 10% penalty tax on the amount.
If you have an investment account outside of the tax-deferred retirement accounts discussed above, you should consider investments that are tax efficient. Tax efficiency, here, refers to how much you earn on an investment in comparison to the portion of the return that’s lost to annual taxes. Tax efficiency can be achieved in various ways. A qualified investment professional and your tax advisor can be a great resource in formulating such strategies.
Municipal bonds (which generate federally tax-exempt income) and U.S. savings bonds (which are exempt from state and local income taxes, and in which you have the choice of paying federal income taxes on the interest either every year or only when you redeem or cash in the bond) are also considered tax efficient. Interest from municipal bonds is generally exempt from federal income taxes, and, in most cases, state and/or local income taxes, so long as the investor resides in the state that issued the bond. However, in some cases, the alternative minimum tax (AMT) may apply to taxpayers who rely on income from municipal bonds. Municipal bonds are subject to credit risk, and they can decline in value when interest rates rise.
Please note, investments may only be offered by properly licensed registered representatives. Product information is provided for informational purposes only and is not intended to offer, advise, or make recommendations on the purchase of a security.
Always remember, the choices you make today can have a tremendous impact on both your current finances and your future retirement.
This material is for informational purposes only. Neither New York Life nor its Agents provide tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.