AARP Getting Started in Rebuilding Your 401(k) Account by Paul Katzeff

Author:Paul Katzeff
Language: eng
Format: epub
Publisher: Wiley
Published: 2010-04-25T16:00:00+00:00

Together, those tell you where you want to go—your retirement-finance destination.

Finally, in Part Three you’ll learn how to reach your destination. That will involve choosing and using an investment game plan. You’ll learn how to pick investments that are right for you.

Let’s turn to the issues in Part Two—measuring your financial goals and resources.

Chapter 12

How Taxes Can Take a Bite from Your Payouts

Most people would rather do anything than think about taxes. Like take out the garbage. Or pluck their eyebrows. Or scrub shower-stall grout with a toothbrush.

Small wonder. The tax code is long and notoriously complex. The specific provisions concerning 401(k) plans alone take up volumes. But how the tax code affects payouts from your retirement accounts is unexpectedly simple to describe.

And it’s important not to skip over this explanation. Understanding how to play by the tax rules can save you big bucks.

Basically, this is a game of dodgeball. The two potential stingers you’re trying to avoid are taxes and penalties.

You get hit with taxes when you take your money out of a traditional 401(k) account. Your withdrawal becomes taxable income. You pay at whatever your ordinary income-tax rate is.

Also, as taxable income, a withdrawal could bump you into a higher tax bracket for the year.

You get hit with a penalty when you do either of two things:1. You take your money or investments out too soon.

2. You leave your money or investments in too long.

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