July 21, 2020

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation

Retirement plans were created in order to provide employees with additional savings to put aside \ for retirement. Whether you’re choosing between a tax-deferred 401(k) or a Roth 401(k), both plans can help you build financial security.

Here are some of the tax benefits and implications you could face with a 401(k):

Tax-deferred 401(k)s reduce the total amount of taxable income. A tax deferred 401(k) allows you to save taxes on the earning of your contributions. This does not mean that you are completely exempt from paying taxes. When you withdraw your earnings, you should expect to pay taxes on the amount you took out. 

When you retire, your income will inevitably decrease, meaning that you will be in a lower tax bracket compared to when you were employed. The money that you take from your 401(k) will be taxed at a lower rate. 

  • Withdrawing early from your 401(k) can lead to a 10% early withdrawal penalty.
  • The IRS allows taxpayers to withdraw without penalty at age 59 ½.

Roth 401(k)s lower post retirement taxes. Earnings for a Roth aren’t taxable unless:

  • You’re 59 ½.
  • You’ve had an account for five years.

Contributions to a Roth 401(k) don’t affect your taxable income that is deducted from your paycheck. The funds are removed after taxes, not before, meaning you are paying taxes as you contribute to your retirement fund. This means that when withdrawing the funds, you may not need to pay taxes. 

Tax benefits are typically based on the total amount of income that is earned and the filing status you use on your taxes. Contributions made to a qualified 401(k) could reduce your tax bill through the Saver’s Credit. This credit can reduce your taxable income based on the percentage you put into your 401(k).

If you need tax help, contact us for a free consultation.