How Is Your 401(k) Taxed When You Retire?

Taxes on a Regular 401(k)

401(k)‘s are simple in their tax treatment. Your contributions are paid with pretax dollars. That is “off the top” of your gross salary. This reduces your taxable earned income which ultimately reduces your current income taxes. The result is your taxes are now “deferred”.  Deferred taxes are due when distributions begin.  Traditional IRA‘s, and SEP-IRA’s are treated the same.

Avoiding Future Taxation

Taxation can be avoided by rolling your 401(K) or IRA into a Roth product. Earnings will be taxed at the time of the conversion withdrawal.  After conversion to a Roth 401(K) or Roth IRA your investment becomes tax free.

Why Make The Conversion Now?

A result of the Trump Tax Reduction Plan in 2020, tax rates are at their lowest in 30 years.  Some economists considered the current tax rates as being “on sale”.  Here’s Why…

The Trump Tax Reduction Plan

The Trump Tax Reduction Plan retains the old structure of individual income tax brackets, but in most cases it lowers the rates.  The tops rate decreases taxes from 33% bracket to 32%.  The greatest impact effects the largest number of American workersThe 28% bracket is reduced to 24% and the 15% bracket to 12%.This represents a four to eight percent reduction in personal income taxes.  The changes will be temporary, expiring after 2025.  Given the inevitable move towards more social government benefits, waiting on transferring your Traditional 401(K) or IRA could be costly.

For more information on ways Vinn Financial can help you avoid the Taxation Risk at retirement, please contact us.

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