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The taxes around retirement accounts

The reality is all of us will face taxes. The more informed you are about the taxes surrounding retirement, the better informed decisions you can make about your future. Let’s dive in.

Question 1

Question 2

Question 3

We’ll have the answers after the break

Want some help planning for retirement. We have your back.

Answers

Question 1

Answer: A & C

401(k) and Traditional IRA accounts are considered "pre-tax" retirement accounts, meaning the contributions you make to them are tax-deductible in the year you contribute. This allows you to reduce your taxable income for that year, providing an immediate tax benefit. The money inside the account grows tax-deferred, meaning you won't pay taxes on investment gains or interest earned until you withdraw the funds in retirement. However, when you do take withdrawals—typically after age 59½—the distributions are taxed as ordinary income. This structure is beneficial for individuals who expect to be in a lower tax bracket in retirement compared to their working years, allowing them to defer taxes until then.

Question 2

Answer: B

You can't roll over HSA funds into a retirement account like a Roth IRA, but you can use an HSA in retirement. If you continue to use your HSA for qualified medical expenses only, you can avoid paying any taxes on previous contributions and any investment earnings. However, using the funds for non qualified medical expenses (including rolling the funds out of the HSA to a Roth IRA) will mean tax implications.

Question 3

Answer: D

The first three answers were incorrect because they misrepresented key features of Roth IRAs.

1. Roth IRA withdrawals are not taxed (as long as conditions are met), so saying contributions are taxed upon withdrawal is false.

2. Annual taxation on earnings doesn't apply to Roth IRAs, which allow tax-free growth.

3. Contributions aren’t taxed again based on income in retirement.

The correct answer explains that Roth IRA contributions are taxed upfront, but withdrawals in retirement are tax-free if the account has been open for five years and the individual is 59½ or older. However, there are withdrawal exceptions for those younger than 59 ½.