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MANAGING TAXES on Your Retirement Savings

Managing Taxes on Your Retirement Savings

The money you save and invest in your traditional individual retirement account (IRA) or 401(k) plan can compound tax deferred for as long as you keep the money in your retirement account. Unfortunately, however, you’ll have to pay income taxes on withdrawals. How can you manage the taxes on your retirement savings? These strategies could help.


Cashing out a 401(k) means you may end up owing a 10% early withdrawal penalty as well as income taxes, leaving you with significantly less money to spend or reinvest. Instead, keep the money in the plan or roll it into another employer’s tax-deferred retirement plan or an IRA.


Generally, you are obligated to start taking annual required minimum distributions (RMDs) from your tax-deferred accounts after you reach age 70½. If you fail to make a required withdrawal, you’ll face a penalty of 50% of the amount that should have been withdrawn.

Taking smaller distributions before you are required to spreads the tax bill over a greater number of years, which could keep you in a lower tax bracket. A tax projection can help you see if this strategy might be beneficial.


With a Roth IRA, contributions are nondeductible but earnings are potentially tax free. Roth IRA owners can qualify for tax-free withdrawals of earnings once they reach age 59½ (or meet other conditions) and have had a Roth IRA for five years. By allocating a portion of your retirement savings to a Roth IRA, you are positioning yourself for tax-free investment growth and withdrawals.*


If you hold equities in a retirement account, any gains will be taxed at your regular — likely higher — income tax rate upon withdrawal from your account. It’s generally preferable from a tax-reducing standpoint to focus on keeping more highly taxed income-producing securities, such as bonds, in retirement accounts.

* Eligibility for Roth IRA contributions depends on income. There are no income restrictions on converting a traditional IRA to a Roth IRA, but a conversion does result in taxable income.