Will You Pay Tax On Your Retirement Accounts ?
By Ian
There are several accounts with tax implications. 401K accounts, Keogh accounts, Roth IRAs and standard IRAs are some of the most important and widely know accounts.

What is an Individual Account (IRA)?

An Individual Account (IRA) is a investment into which you put contributions on which you do not pay taxes until you withdraw the money from the account after you retire. Usually, your tax bracket will be lower after and so you won't have to pay as high a percentage of the money in taxes as you would have if the money had been taxed at the time it was originally earned. When you put money into an IRA, you get a tax deduction. When you take a "distribution" from that IRA later, it counts as taxable income. There are penalties for early withdrawal up to age 59 1/2.

You are required to start taking money out of your IRA no later than at age 70 1/2.

You should check with your accountant or the IRS to see how much you can contribute in the current tax year. How much of this money is tax deductible depends on your Adjusted Gross Income (AGI) and whether you are covered under an employer plan.

There are other variations of the standard IRA, such as the "Simple IRA," a relatively new but popular employer based plan allowing employer contributions and a higher contribution by the taxpayer.

What is a 401K Account?

A 401K plan is named after a section of the 1978 U.S. Tax code. It is a plan offered by employers which allows you to automatically save a portion of your income for without paying taxes now on the money you are saving. As with the IRA, the idea behind it is you'll be in a lower tax bracket after and therefore will have less tax to pay on the saved money than you would pay now at your higher salaried income rate. You only pay taxes on the money when you withdraw it from the 401K account after retirement.

Usually, the 401K money is automatically deducted from your paycheck by the company's payroll system in much the same way your taxes are withheld.

In its basic configuration, a 401K account is similar to a standard IRA, but in many employers' plans, there is a matching contribution from the employer which provides the real power to the plan. Beware. Many companies invest the 401K plan money heavily in their own company stock. If the company has an unusually bad financial problem, you might find this money in jeopardy as well as your job. The best 401K plans allow you to control the investment vehicles for your money.

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