IRA’s

IRA’s, or Individual Retirement Accounts, are another popular way to save for retirement. There are two types of IRA’s – traditional and Roth. Traditional IRA’s work similarly to 401k’s in that the money you contribute is not taxed until you withdraw it in retirement. With a Roth IRA, however, the money you contribute is taxed upfront but then grows tax-free and can be withdrawn tax-free in retirement.

With both types of IRA’s the money that is in the account grows tax free. With traditional IRA, you can limit the amount of tax deduction since that is pre-tax money going into the account. That will lower your taxable income for the year.

Unlike 401k’s the contribution limit is quite a bit lower, as it is only $6,000 a year and if you are 50 or older can contribute up to $7,000 a year. If one is to withdraw before 59 and a half, there is a 10% penalty on top of any taxes that might be owed in a traditional IRA.

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Social Security

Social Security is a government-sponsored retirement program that provides benefits to retirees. The amount of your Social Security benefit is based on your earnings history. Social Security benefits are taxed as ordinary income, but only if your total income (including your benefit) is greater than $25,000 for an individual or greater than $32,000 if filing a joint tax return. Otherwise, there is no taxes on your social security benefits. The benefits of social security is that it provides income to retirees during their retirement and it also give you the option of when you would like to receive their benefits. The drawbacks are that some people are not eligible for social security and that there is worry that the social security funds are dwindling and it might not provide you any benefits by the time you decide to retire.

Private Income

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Private income, such as pensions or annuities, is also taxed as ordinary income. If you bought an annuity, it was more than likely purchased after tax dollars so in that case the only taxes on the annuity would be on the earnings of the annuity. Pension is going to be taxed at the regular federal rate, but some may have an option to take a lump sum, if elected to do so when you file taxes the next year, the taxes will be included in your next tax election. As you can see, there are a variety of different ways that retirement income can be taxed. It’s important to understand how each type of income will be taxed before making any decisions about your retirement savings. Depending on how you have your retirement savings will determine your tax implications. Each one of the types of retirement savings will differ on how they are taxed.