Understanding Taxation of Retirement Accounts

Understanding Taxation of Retirement Accounts

Retirement accounts have certain tax advantages, and their regulations are simpler than other types of investments. However, there are some things you have bear in mind when you prepare your taxes at the end of the year.

There are different types of retirement accounts, and all of them have their own set of tax rules.

Traditional vs. Roth IRA’s


There are two types of Individual Retirement Accounts (IRA’s), and both of them are taxed in different ways. Certain contributions made to Traditional IRA’s can be deducted from your taxes, but they will be taxed when you withdraw it. This includes any interest you have earned on that amount. However, non-deductible contributions will not be taxed during the withdrawal period.

Contributions made to a Roth IRA are not tax deductible, which means that they will not be taxed when it’s time to withdraw.

Early Withdrawals


If you take money out of a retirement account before you’re 59 ½, you will have to pay a 10% penalty in addition to income tax. So, it would not be advisable to do so. Any withdrawals must also be reported on your tax return, and early withdrawals must be reported on Form 5329.

The penalty for early withdrawals may be waived in some cases, which can include:

  • If you have a permanent disability
  • If you are unemployed and paid for a health plan
  • If you have medical expenses that make up more than 7.5% of your annual income
  • If they were part of a tax levy from the IRS
  • If they were for higher education expenses for you or your dependent

Be sure to think about your circumstances carefully before you decide to make an early withdrawal.

401(k) Rollovers


If you’re doing a rollover from a 401(k) or any other retirement account to an IRA, they’re usually not subject to taxation. However, they are still on a “tax-deferred” basis, so they will be taxed when they’re withdrawn. As long as it’s a direct rollover or is deposited within 60 days of the 401(k) distribution, it will not be subject to any taxation or penalties.

Any pre-tax funds that you move into a Roth IRA will be taxed as ordinary income, which could put you in a higher tax bracket. However, if contributions were taxed before they were deposited, they will not be subject to income taxation again.

Finding a Tax Professional


Tax laws can be complicated, and every type of retirement account has its own set of rules. Whether you have an IRA, a 401(k), or any other type of investment, it helps to have a tax professional to help you understand the rules for whatever you have in your portfolio.

Of course, not all tax professionals are the same, which is why you need to find the right person for your specific situation. If you’re looking for someone to help you with your tax return, a tax accountant will be your best option. However, this person will not be able to help you if you run into a legal issue. A tax attorney will be better suited for that role, and they will be able to represent you more effectively.

Tax Law Tampa has a team of expert tax attorneys who can make sure you comply with all tax regulations, and we can help you prepare your tax return at the end of the year. Our staff can also help you if you are being faced with a legal issue, and we can come up with a feasible solution.

We will sit down with you, and will work on your behalf. That way, you can put your tax problems behind you. Tax problems should never be ignored, as it will only make matters worse. That’s why you can’t afford to put it off, and that’s why you shouldn’t wait to speak to one of our attorneys.

Failing to act can lead to serious consequences, and it may lead to more liability than you can afford. You don’t want to wait to take whatever steps are necessary to address these issues, which is why you need to speak to a qualified tax attorney.

If you want to find out how we can help you, get in touch with us today!




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