Even if you’re saving money in a 401(k), IRA, or another type of retirement account, you may not be paying much attention to the specific rules and regulations governing these accounts. After all, if you’re years away from retirement, many of these regulations are likely to change.
But a major part of retirement planning involves knowing the broad strokes of retirement rules. Think you can pass our five-question quiz?
True or False: You must be age 59.5 or older to withdraw any retirement funds.
False. Generally, you can withdraw any of your 401(k) or traditional IRA funds for any reason before you turn 59.5—if you’re willing to pay taxes and a 10 percent penalty.1 Once you turn 59.5, you’ll only pay taxes, not penalties, on your 401(k) or traditional IRA withdrawals.
However, if you have a Roth IRA, you can withdraw contributions—tax and penalty-free—at any time.2 And if you have a 457 account (common among government and public service employees), you can usually withdraw your contributions without paying any penalty once you retire, even if you’re younger than age 59.5.3
True or False: Your employer 401(k) match is completely free money.
True! You don’t pay taxes on any match your employer makes to your 401(k) contributions, which makes taking advantage of the match a no-brainer. Even if you can’t afford to contribute any more than the match to your 401(k), maximizing your match can boost your savings by thousands of dollars by retirement.
True or False: It’s always best to delay taking Social Security for as long as possible.
False. When it comes to the decision of when and how to begin drawing Social Security benefits, there is no one-size-fits-all answer. The longer you delay your benefits (until age 70), the larger your monthly check will be—it grows at a rate of about 8 percent per year.4 But if you need this money to support yourself in your early 60s or if you have a health condition that could shorten your lifespan, it may make more sense to take early Social Security at age 62.
True or False: You can contribute up to $6,000 to a traditional IRA and $6,000 to a Roth IRA each year.
False. The 2021 IRA contribution limit is indeed $6,000 (for those under age 50) and $7,000 (for those age 50 and over).5 However, this is a total limit—if you’re under 50 and contribute $2,000 to a Roth IRA, you can contribute a maximum of $4,000 to a traditional one, and vice versa.
True or False: Your 401(k) withdrawals are subject to capital gains taxes.
False. 401(k) withdrawals are taxed as ordinary income.6 This means if you retired from a job paying $65,000 per year and began withdrawing $65,000 per year from an IRA or 401(k), your total taxes owed are unlikely to change.
The tax treatment of your retirement funds can become even more important as you draw closer to retirement. Your financial professional can evaluate the tax status of each of your retirement accounts and work with you to create a plan for tapping these funds in a tax-efficient way.
Important Disclosures:
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
1 https://www.nerdwallet.com/article/investing/early-withdrawals-401ks
2 https://smartasset.com/retirement/ira-withdrawal-rules
3 https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section457&num=0&edition=prelim
4 https://www.nerdwallet.com/article/investing/take-social-security-benefits
5 https://www.nerdwallet.com/article/investing/ira-contribution-limits
6 https://www.bankrate.com/finance/taxes/how-are-401k-withdrawals-taxed.aspx
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