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When Should You Pay Taxes on Retirement Savings?

By Steve Gaito

McDowell County


The answer depends on how diversified your retirement strategy is and how well your combined accounts, from your 401(k) to your Social Security, work together to manage your tax burden. The primary benefits of a 401(k) are the compounded earnings on your savings and the potential tax savings. You fund your retirement with income that is tax-deferred to take advantage of the presumably lower tax rates at retirement age. But many people don’t realize the overall implications of these contributions. Many think they’ll be in a lower tax bracket during retirement by default.

The truth is that any amount withdrawn from a 401(k) or similar plan during retirement is taxed just like the income you receive while you’re working. Contributing to a 401(k) with pre-tax income minimizes the amount of taxes you pay now, but you could end up in a higher tax bracket than you expected during retirement which could negate your current tax savings.

Retirement savings with a 401(k) and similar plans are taxed later (deferred), while other retirement vehicles are taxed annually or rarely taxed at all. Understanding how different retirement income is taxed is essential for creating a diversified portfolio for a retirement that provides flexibility and minimizes your tax burden:

  • Taxed Annually-Investment brokerage accounts and some other savings accounts that produce interest, dividends, and capital gains are always taxed annually.
  • Taxed Later-Savings accounts like a 401(k) are taxed upon withdrawal and hard assets like real estate are taxed when a capital gain is realized.
  • Taxed Rarely-Roth IRAs, interest from municipal bonds, and certain types of life insurance are rarely taxed.

The obvious difference between these tax scenarios is when you incur the taxes. The less evident factors like future tax brackets and the amounts you withdraw from different accounts can mean the difference for creating a sound financial future. The best way to take advantage of all the factors is to diversify among a variety of accounts to fund your retirement. Understanding the nuances of different retirement funds, the cumulative tax implications, and how different accounts work together to minimize your tax obligation is critical for getting the best ROI for your retirement savings.

A CERTIFIED FINANCIAL PLANNER™ professional can help you take a comprehensive approach to your retirement strategy to decrease your overall tax burden and make the most of your retirement resources. Your retirement planner will show you how to reach your short- and long-term financial goals for more total savings over a longer period to build the retirement you deserve. Join forces with a CFP® practitioner to secure your financial future.



Steve is owner of Faith Based Health Care and Retirement Resource Management. He is a National Speaker on the topic of Social Security optimization, quoted in national publications like Money Magazine, US News and World Reports and Fox Business. Steve loves to educate and teach on financial topics like taxation of retirement accounts, long term care, healthcare, and efficient savings plans for small businesses. He has provided financial planning for missionaries through the International Mission Board. You can find Steve at 68 South Main St. in Marion, NC by calling 828-559-0299, email or visit his website at