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How You Own Assets Impacts Taxes: Pre-Tax

How you own financial assets determines how they are taxed. Click here to review "Investments and Taxes”.

To encourage us to build assets for retirement, the government has created "tax advantaged” or qualified accounts, these include: IRAs, ROTH IRAs, 401(k)s, ROTH 401(k)s, TSP, ROTH TSP, 403(b) ROTH 403(b)s, SIMPLE IRAs, SEP IRAs, 457 plans, ROTH 457 plans, Pension Plans, etc.

The "traditional” versions of the above:

  • Allow you to deduct current contributions to reduce your taxable income for the current year. 
  • Your accounts grow tax-deferred. This means you aren’t taxed each year as Dividends and Interest are paid and Capital Gains received.
  • Upon withdrawal you are taxed at Ordinary Income rates--whatever they are at that time--according to your filing status (Single, Married Filing Jointly, etc.).
  • Unless you meet an exception, for most accounts you will pay a 10% penalty for taking money prior to turning age 59½.

NOTE: Even though you are a long-term investor with a 20 or 30 year time horizon, upon withdrawal your dollars contributed plus growth are taxed as Ordinary Income. You do not benefit from lower capital gains tax rates on long term investments. But it offers tax-deferred growth which is important.

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