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What retirement account is tax-free?

What Retirement Account is Tax-Free?

Understanding Tax-Free Retirement Accounts: Maximizing Your Savings for the Future

A survey by GOBankingRates found that only 14 percent of Americans have $100,000 or more saved for their retirement. That sounds pretty bad if you take into account how much you would need to actually retire. Unfortunately, the findings are worse than that. A very high percentage (almost 37 percent said they haven’t started saving for retirement at all!

Saving for retirement is essential, and you need to figure out the best ways to do that. When planning for retirement, it’s essential to consider the tax implications of different retirement accounts. While many retirement accounts offer tax advantages, there are specific accounts that provide tax-free growth and distributions.

“Retirement accounts like Roth IRAs and Roth 401(k)s provide advantages for people saving for their future without paying taxes.” Robert Cavanagh, senior VP of David Lerner Associates, states. These accounts are attractive for retirement savings due to their tax-free growth and tax-free distributions. By considering the advantages of tax-free accounts, individuals can strategically diversify their retirement portfolio.” Depending on your individual situation you may want to do some more research.

Retirement Accounts with Tax Advantages:

Tax-Free Retirement Accounts:

Tax-free retirement accounts refer to investment vehicles that allow individuals to contribute after-tax dollars. The earnings within these accounts grow over time. The money can be withdrawn tax-free but there are certain conditions.

Roth Individual Retirement Accounts (IRAs):

Individual retirement accounts (IRAs) represented 34 percent of US total retirement market assets, compared with 23 percent two decades ago. Roth IRAs are retirement accounts that offer tax-free growth and qualified withdrawals in retirement. With a Roth IRA, individuals contribute after-tax income, meaning contributions are not tax-deductible. However, the earnings within the account grow tax-free, and qualified withdrawals, made after age 59 ½ and held for at least five years, are tax-free.

Roth 401(k) accounts resemble Roth IRAs but employers offer them through sponsored retirement plans. Like a Roth IRA, contributions to a Roth 401(k) are made with after-tax dollars. The earnings within the account also grow tax-free, and qualified withdrawals during retirement are tax-free. However, it’s important to note that not all employers offer Roth 401(k) options, so availability may vary.

Tax-free retirement accounts provide several advantages that make them attractive options for individuals seeking to maximize their savings for retirement.

  1. Tax-Free Growth: Perhaps the most significant benefit of tax-free retirement accounts is the potential for tax-free growth. Traditional retirement accounts have contributions and earnings that are taxed upon withdrawal. Tax-free accounts allow investments to grow free from annual taxes. This can result in significant savings over time, especially considering the compounding effect of tax-free growth.
  2. Tax-Free Distributions: One of the primary goals of retirement planning is to ensure a steady income stream during retirement. With tax-free retirement accounts, qualified withdrawals made during retirement are tax-free. This means that individuals can access their retirement savings without incurring additional tax liabilities, allowing for greater financial flexibility and potentially higher spendable income during retirement.
  3. Diversification of Tax Liability: Having a mix of tax-free and tax-deferred retirement accounts allows individuals to diversify their tax liability in retirement. By having a portion of retirement savings in tax-free accounts, individuals can strategically plan their withdrawals to optimize their tax situation. This flexibility can help minimize the overall tax burden and potentially maximize the amount of money available for retirement expenses.
  4. No Required Minimum Distributions (RMDs): Unlike traditional retirement accounts such as traditional IRAs or 401(k) plans, tax-free retirement accounts like Roth IRAs do not have required minimum distributions (RMDs) during the account holder’s lifetime. This allows individuals to maintain control over their assets and potentially pass on a tax-free inheritance to their beneficiaries.

Once you retire, you will want to have created a tax-efficient income stream during your post-career years. It is always recommended to consult with a financial counselor to determine the most suitable retirement account based on individual circumstances and goals.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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