Here are some basic types of retirement accounts, including 401(k)s, Roth IRAs and even HSAs.
Transcript:
CONWAY GITTENS: Now, Bob, real quick, walk me through some of the options for retirement savings, because a lot of people start scratching their head. It’s like alphabet soup, 401(k), Roth IRA, all these numbers, all these letters. But there are tax implications not just for the money that you’re putting in, but when you’re ready to retire, the money that you’re going to take out. So can you talk a little bit about how those different plans work, especially when it comes to taxes?
BOB POWELL: There are three basic types of accounts. There would be the taxable account where you might be investing in stocks and bonds, and mutual funds. And the money that’s going in is after tax. And then when it comes out, it will be taxed in some form or fashion or it’ll be taxed along the way. So if you’re investing, say, in a CD that could be taxed as current interest, income as ordinary income, it could. It could be maybe if you have stocks in your taxable account and you’re buying and selling them, it could be taxed as capital gains as you go along. The other type of account that many people are familiar with would be an IRA or a 401(k), typically that’s money that’s going in on a pre-tax basis and then coming out on an after tax basis. So you’re getting a tax deduction in many respects for putting money into a 401(k), it grows tax free. And then when you withdraw the money, it gets taxed as ordinary income. And then the last type of account that people need to think about would be a Roth IRA, where the money is going in on an after tax basis. It comes, it grows tax free. And then when you withdraw the money years from now, it is a non tax or a tax free event. And so that. And then the last account I should mention, because many employers are now offering this to their employees would be health savings accounts. And these are really unique because the money’s going in on a pre-tax basis. It’s growing tax free. And then if it’s used for qualified medical expenses, it’s tax free as well on the withdrawals. So four different types of accounts. And I would recommend that people sort of have money in each of these buckets because when you get to retirement, one of the things that you want to make sure that happens is that you have the ability to create what’s called tax efficient income. What’s the income that will result in the least amount of taxes based on where the money is coming out of whether it’s your Roth or your taxable account or your IRA or your HSA for that matter. And what typically happens to many people is they save almost exclusively in their 401(k), and then when they get to retirement, they think they might have a million set aside for retirement. But what in fact happens is you actually may only have 700,000 set aside because $300,000 of that money will get taxed as ordinary income as it comes out of the account. And if you had saved perhaps in a traditional 401(k), along with a Roth 401(k), then you might at least have the option of being able to withdraw some money tax free in retirement, as well as money from your traditional 401(k) and maybe reduce your overall tax burden over the course of your retirement, which is ultimately the goal.
Subscribe |
Earn. Live. Invest. |
TheStreet Pro |
#retirement #401k #savings
source
