No matter what type of account they’re kept in, your retirement investments will be subject to taxes. However, by understanding their relationship, you can either raise or lower the tax burden on your nest egg. The following information explains how they are interconnected so you can make smart financial decisions.

Income Taxes

Most people have 401(k) accounts set up through their work. While contributions are pre-tax, withdrawals will be taxed at the same rate as any other type of income. Additionally, if you begin making withdrawals before age 59½, an additional 10% tax is added as a penalty.

Conversely, if you have a Roth IRA, withdrawals are usually free of taxes because the account was funded with post-tax income. People under 59½ are also allowed to withdraw the same amount as their original contribution without penalty. For those who are older or who’ve had their accounts for five years or more, withdrawals of any amount are not taxed.

Estate Taxes

No matter where they are held, all proceeds of an estate are subject to an estate tax if they exceed a certain amount. In 2017, the exemption level was $11.2 million per person and $22.4 million per married couple. Because exemption levels are so high, most people don’t have to worry about estate tax. However, if you anticipate your estate will be worth that much, consider making charitable donations or investing in an irrevocable life insurance trust to keep yourself below the limit.

Understanding how your retirement accounts will be taxed can be confusing. But Donna Sellers, CPA will help you make sense of the tax code using her more than two decades of industry experience. This skilled CPA also offers many other essential services, including bookkeeping, financial planning, and help with audits. Schedule a consultation in Brownfield, TX, today by calling (806) 637-8556.