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How do taxes impact retirement savings?

Preparation for retirement is a marathon, not a sprint. It is important to address a range of different issues to help better ensure a stable financial foundation when enjoying one’s sunset years. One important area to take into consideration involves tax obligations.

Taxes generally impact retirement accounts in one of three ways:

  • Before investment. Some accounts allow for the payment of taxes prior to investment. This includes Roth IRAs. With these accounts, additional taxes are generally not due when payments are taken from the account during retirement.
  • After investment. Other accounts require payment of taxes when payments are made from the account. This includes traditional 401(k) and IRA accounts. This means the taxes are essentially deferred until a later date.
  • Ongoing. Other investments generally require ongoing taxes, potentially through the payment of a capital gains tax, on an annual basis. Although there are not many tax advantages to these types of accounts, they do allow for greater flexibility. The account holder can remove funds without worrying about reaching a certain age to avoid penalty fees.

A publication by Investopedia recommends having funds in each of these three categories. This type of diversification will allow the account holder greater flexibility by combining fluidity of assets with tax savings.

A failure to properly follow tax laws can result in contact from the Internal Revenue Service (IRS). This contact could signal an impending audit or tax controversy. It is wise for those who receive this type of correspondence to seek legal counsel. An experienced attorney can assess your situation and discuss your legal options. 

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