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Navigating Taxation on Retirement Funds


a person with a table covered in calculators, papers, and pens offers a tax form to another person

Saving for retirement is a smart financial move, and understanding the taxation on retirement funds is equally crucial. Traditional IRAs and employer-sponsored retirement plans are tax-deferred accounts, meaning taxes are deferred until funds are withdrawn in retirement. It's important to note that taxable withdrawals taken before age 59½ may be subject to an additional 10% federal tax penalty, with some exceptions available.

One unique feature of traditional IRAs is the concept of "cost basis" for those who made nondeductible contributions. The recovery of this basis is not counted as taxable income, providing some tax advantages. On the other hand, Roth IRAs and Roth employer-based accounts are funded with after-tax dollars, allowing qualified distributions to be tax-free after age 59½ and a five-year holding period.

When it comes to required minimum distributions (RMDs), most retirement accounts are subject to this rule after you reach age 73 (for those reaching age 72 after December 31, 2022). Failing to take an RMD on time can trigger a federal tax penalty of up to 25% on the amount that should have been withdrawn. However, Roth IRA owners are exempt from RMDs, while beneficiaries of traditional IRAs and employer-sponsored retirement plans must adhere to RMD rules.

As you plan for your retirement and begin taking distributions, staying informed about required dates and distribution amounts is essential to avoid unnecessary penalties and maximize the benefits of your hard-earned savings. Be sure to schedule a meeting with us if you're nearing retirement and are ready to learn more!



Want to learn more about taxes on IRA and employer sponsored retirement funds? Check out the Futurity Wealth Management blog below!



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