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Your Retirement Savings Account: Things you must grasp about it well before you retire
Do you understand whether or not your retirement savings will ever get taxed, or when that happens? What exactly are mandatory withdrawals, and when do they start? How to best leave retirement savings to your heirs? If your grasp is fuzzy on any of these questions, then read on:
TAXES: Unless your tax-sheltered retirement savings account is a ROTH type, then any money that you withdraw from it definitely will be taxed. The government set this deal up for you (and it is a good deal, because it allows your money to grow faster) to encourage you to save…but eventually Uncle Sam wants his share, since your contributions were made with untaxed income. (With a ROTH account, however, you’ve contributed net income, not gross. Since you’ve already paid taxes, you won’t pay any more when you withdraw.)
MANDATORY WITHDRAWALS: Once you hit age 70½, you must start withdrawing—and paying taxes on any money you’ve withdrawn (unless it’s a ROTH). The minimum withdrawal at that age is only 3.65% of the total balance, but it increases gradually with each year. However if you live to be 100, the minimum withdrawal is still only 15.87% of the total. (No mandatory withdrawals are required for ROTH accounts.)
LEAVING $$ TO HEIRS: Therefore, if you only withdraw the required minimum over the years, you can leave the rest to your children—who will then have to pay tax on their withdrawals. Before Congress recently changed the law, your children were able to spread the withdrawals over their lifetimes, but now they must drain the accounts completely within ten years of inheriting it. (Your children will not have to pay any taxes on withdrawals from a ROTH account.)
ROTH: These accounts have definite advantages, and if you can afford to contribute net rather than gross income you may prefer to do that. (Ask your tax professional if it makes sense for you.) However if you decide not to go with a Roth, know that traditional non-Roth savings accounts are still wonderful vehicles for saving for your retirement.
For more details, read Liz Weston’s complete article: