Chicago and AZ

Plenty of people know they have an IRA, 401(k), or another retirement account, but it’s likely that many of them don’t understand the tax implications of their own account. As financial consultants, Alpha Fiduciary often advises clients on how their retirement accounts work so they can avoid expensive mistakes and lost opportunities. The below guide touches on how taxes work for a few common account types. But we welcome you to call to discuss your situation in detail with one of our financial advisors.

401(k)s

For many, a 401(k) represents the largest investment account they will ever have. Participants shield a portion of their income from tax every paycheck for years to accumulate a large sum to use at retirement. Because the contributions were not taxed when they went in, they are taxed as ordinary income when they come out. If your tax rate at retirement is lower than it was while you were working, you can end up saving on taxes. Your 401(k) might offer a Roth option. If you’re in a relatively low tax bracket or expect your taxes to be higher in the future, this option makes sense because you pay your tax now but avoid tax all together on distributions taken out at the appropriate age. Keep in mind that both types of 401(k) may have penalties if you take the money out too early.

Traditional IRAs (Contributory, Rollover)

Like a 401(k), a traditional IRAs let you put a little extra away and reduce your taxable income. But there can be limits on deductibility depending on your income level and participation in another retirement plan. And like a 401(k), you can take out your money as taxable income once you reach 59 ½. Early withdrawals for IRAs and 401(k)s can incur a penalty, though, so you have to be careful about timing.

Roth IRAs (Contributory, Conversion)

Providing you don’t earn above the allowable limits, you might be able to fund a Roth IRA. If you put money into a Roth during the year, you don’t get a tax deduction; however, you don’t have to pay tax on the money or any of its earnings when you take the money back out as long as you follow the rules and leave the money in at least five years and don’t dip into the funds before 59 ½. Even if you do, however, you can always get your original contributions out tax-free.

Why You Might Need a Financial Advisor or Tax Advisor

While many retirement accounts fall under one of the categories above, there are others like SEP IRAs, SIMPLE IRAs, 457s, 403(b)s, and other accounts that have slightly different rules. Unless you work in the financial industry on a daily basis, you probably haven’t considered how to use the rules to your greatest benefit. Your tax advisor can explain how the accounts work, but a wealth management firm such as Alpha Fiduciary who can integrate the tax rules with your specific investment strategy can discuss with you how to structure your portfolio to take the most advantage.

Why Alpha Fiduciary?

At Alpha Fiduciary we understand that “you don’t know what you don’t know.” Therefore, we offer a no-charge Second Opinion Service whereby we will meet with you to complete our Total Client Profile, a process we use to identify your most pressing needs such as estate planning, investment management, or retirement planning. We will identify and help you prioritize the tasks to be completed, and we will interact with your other professionals, or refer you to professionals we know, so you can relax.

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