Paying Taxes On Retirement Accounts
Before you can understanding the process of paying taxes on retirement accounts you first need to understand the differences between the options you have.
An IRA is the account you put money in to before paying taxes. This translates to you reaching taxable income after you have subtracted the money that will go in to the account. The money in your IRA is not taxable until you have withdrawn it at retirement. If by chance you have to withdraw the money before you are at least 59.5 years old you will be charged a penalty for doing so. You must, however, start to withdraw the money by the time you are 70.5 years of age though.
The 401k got its name from a 1978 tax code and it lets you subtract the money from a paycheck before taxes and put that money in a retirement savings. You pay taxes on this money once you have withdrawn it. The reason for tax free accounts like these is so you won't be in a high tax bracket once you have retired because at retirement you have a lower tax liability.
For those self employed individuals there are some customized plans you can go with. For people that fall in to this category you can set up any qualifying plan on your own. Sometimes these plans end up having benefits that an IRA or 401k doesn't have.
For example, the money that goes in to an account like this is taken from your gross income so the amount you contribute can be a lot higher. As with other types of accounts you won't pay taxes on this until the money has been withdrawn. Another great benefit is that a lump sum withdraw can sometimes be eligible for what is known as a ten year averaging.
A Roth IRA is totally opposite of all the other accounts listed above. With these accounts you actually pay the taxes before you deposit the money, but you won't have to pay any once it has been withdrawn. What this basically means is that your account can bloom and grow completely free of tax liability. Another positive benefit of the Roth IRA is that there is no set age limit for withdrawing that money.