5 Types Of Retirement Income And How They're Taxed

401(k) And 403(b)

Both of these tax plans are types of tax-advantaged retirement plans that delay when taxes must be paid on the money within the retirement vehicle. Some employers offer a 401(k) plan, which enables them to put money into an account comprised of various securities before taxes are paid on those monies. A 403(b) account is similar to a 401(k) retirement account, except it is limited to use by only some public school employees as well as full-time employees of nonprofit organizations. A huge benefit to these accounts is you can deduct the contributions from your taxable income each year to lower your tax burden. This means, on average, less is taken out of every dollar you make.

You can begin withdrawing from a 401(k) or 403(b) at the age of fifty-nine and a half. These withdrawals in retirement are then subject to whatever income tax rates are in place at the time of the withdrawal. Thus, if you do not plan to retire for the next thirty years and are participating in an employee-sponsored 401(k) or 403(b) retirement plan, your taxes could look very different than they do today. Congressional tax changes could have either positive or negative impacts on your retirement depending on whether future income tax brackets are higher or lower than present day.

Continue reading to reveal key details about Roth IRAs.