It’s no secret that taxes can be complicated, especially when it comes to how they relate to your investment accounts and retirement savings. Independent wealth management advisor Mike Reeves of Strategic Wealth Designers joined the newscast to break down how your retirement income may be taxed. The three types of accounts are tax-free, tax-deferred, and taxable investing.
“Tax-free accounts allow you to grow your money without paying taxes,” Reeves says. “You contribute with after-tax money, and don’t pay any taxes upon withdrawal. Examples of this are Roth IRA and Roth 401(k) accounts. Tax-deferred accounts require you to pay taxes when you withdraw funds in the future. These include traditional IRA and 401(k) accounts. Finally, taxable accounts require you pay taxes on any gains.”
While there are generally fewer restrictions on taxable accounts, they may not always be the best place to allocate your money. In taxable accounts, you must pay taxes each year. Consequently, it is best to only keep living or emergency expenses in this type of account. “Obviously, tax-free is ideal, but tax-deferred is another good option when choosing how to invest your retirement savings,” Reeves says. “Using a tax-deferred account will still give you the benefit of compounding interest.”
Many people overlook factoring taxes into their retirement planning, which can create a gap between what you need and what you have in your savings. Additionally, every retirement scenario is different. Factors such as the amount you are saving and when you will need to withdraw funds will help determine what account is best for you. To see additional stories surrounding business and economic news for the Indianapolis area, visit https://CBS4Indy.com/Strategic-Wealth and if you have a question for Mike send an email to email@example.com.