Retirement is Tax-Free — FLASE
Short answer: retirement is not tax-free. Long answer: retirement can be tax-free.
Retirement is not tax-free by default. However, through proper planning decades in advance, you can achieve a retirement where you will pay little to no taxes.
If you do plan accordingly and reach a tax-free retirement, there are still rules and limits that dictate how benefits and tax-free accounts operate.
How Does Someone Get a Tax-Free Retirement?
There are plenty of financial planners and math experts, each with intersecting and divergent methods, who have theorized the best ways to achieve a tax-free retirement.
However, for the sake of brevity, here are the two main types of retirement accounts that allow people to minimize their tax bills.
- Tax-Exempt: No federal or state tax is due on the income earned on a tax-exempt account. Withdrawals from these types of accounts are also tax-free in retirement. Examples include Roth IRAs and Roth 401(k)s.
- Tax-Deferred: You are allowed to postpone paying taxes on the money invested until it is withdrawn, usually after retirement. Your tax savings are realized when you make contributions to these accounts. Examples include traditional IRAs and 401(k)s.
What is the Difference Between Roth IRAs and Traditional IRAs?
When you make contributions to a Roth IRA, it is done so with after-tax dollars. What this means is that qualified distributions are tax-free.
After-tax money in a Roth IRA can grow tax-free, making it an appealing option for those who start saving early.
In the case of a traditional IRA, contributions may be tax-deductible at the point in time they are made.
High earners usually chose traditional IRAs because they get to benefit from their tax savings upfront. Once in retirement, they will take the hit to their taxes but, ideally, they would have moved into a lower income tax bracket by then.
Will Tax Debt have an Effect on Your Retirement Accounts?
Despite how robust and well-planned your retirement plan is, if you fail to pay or file your taxes, you will be susceptible to IRS penalties.
Should your back taxes go unresolved for long enough, the IRS can seize your assets through a levy – which can include your retirement accounts.
If you have a levy on your assets or have back taxes, you can take the following steps.
- Click here to take our brief survey to pre-qualify for tax debt relief.
- Speak with one of our expert Resolution Officers.
- Start your resolution process!
Any new or systemic Liens and/or Levies will also be suspended for the time being.
For taxpayers who are considered “seriously delinquent”, the IRS will suspend any new certifications for the remaining period. Any taxpayer who falls into this category in reminded and encouraged to enter into an Installment Agreement or apply for an Offer In Compromise.
The IRS will not forward any new delinquent accounts to private collection agencies at this time.
Taxpayers have until July 15, 2020 to verify to the IRS they are qualify for the Earned Income Tax Credit or to confirm their income. If the taxpayer is unable to verify their credentials or provide appropriate documents for this credit, they are encouraged to notify the IRS before the deadline. No cases will be denied this credit for failure to provide requested information until July 15.
Case workers will continue business as usual. However, most case work will be conducted remotely (video/over the phone conferences). Any requests for documentation sent by the Office of Appeals should be responded to in a timely manner to ensure a smooth process.
The IRS will continue to take the appropriate measures to stay compliant and protect the applicable statutes of limitations. In situations where certain statutes may be compromised, taxpayers are encouraged to extend such statutes. Otherwise, Notices of Deficiency will be issued by the IRS and similar actions will be pursued to protect the interests of the government in preserving such statutes. Where a statutory period is not set to expire during 2020, the IRS is unlikely to pursue the foregoing actions until at least July 15, 2020.
Practitioners are reminded that PPS wait times may be significantly longer, depending on staffing levels and allocations going forward. The IRS will continue to monitor this as situations develop.
“The IRS will continue to review and, where appropriate, modify or expand the People First Initiative as we continue reviewing our programs and receive feedback from others,” Rettig said. “We are committed to helping people get through this period, and our employees will remain focused on these and other helpful efforts in the days and weeks ahead. I ask for your personal support, your understanding – and your patience – as we navigate our way forward together. Stay safe and take care of your families, friends and others.”
Learn how easy it is to qualify for tax savings.