Your Options For Taxes
We all probably share the goal of minimizing what we pay in taxes—now and in retirement. So, let’s take a step toward that goal right now.
Roth vs. Pre-tax Contributions and Withdrawals
Contributions
Your 401(k) account is a way to help reduce taxes, and you can choose how by which type of contributions you make:
- Pre-tax contributions avoid taxes now, but you pay taxes when you withdraw the money in retirement. Keep in mind, that means you’ll pay taxes on any investment growth you have over the years (or decades) until you retire.
- Roth contributions are taxed now, but you don’t pay taxes on any investment growth when you take the money out, if the withdrawal is qualified.* If you are years away from retirement, that could save you a lot in taxes.
Withdrawals
When you withdraw money from your 401(k) plan account, those distributions are taxed differently than any personal investments you make on your own. After age 59½ you can make qualified Roth withdrawals from your retirement accounts penalty free, but any pre-tax contributions and after-tax contributions will require tax payments. Which means you may want to consult a tax professional before making any big financial moves (like 401(k) withdrawals).
Income Taxes on Social Security
In retirement, you will continue to pay taxes on your income, including a portion of your Social Security payments if your combined income is over $25,000 as an individual or $32,000 if you file jointly. Most people have lower income in retirement, so you might be in a lower income tax bracket. If you plan on working part-time while retired, you may consider strategies for when you claim Social Security or other tax implications if you think your income will be higher than the amounts above. Learn more in the article below!
Social Security Tips for Working Retirees
Taxes and Your Health Savings Account (HSA)
Save even more on taxes by contributing to a Health Savings Account (HSA) now. You can contribute to an HSA as long as you are not enrolled in Medicare. HSA contributions are tax-free when contributed directly through payroll deductions. Your investments grow tax-free, and withdrawals for qualified medical expenses are not taxed either! That means that you'll get a triple-tax advantage† when you contribute to an HSA.
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* For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied and the distribution must be made after you turn age 59½, are disabled, or after your death.
† With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation.