Retirement Plan Taxation
Retirement plan taxation covers the tax treatment of contributions to, earnings within, and distributions from qualified and nonqualified retirement plans.
Explanation
Traditional IRA and 401(k) contributions are generally tax-deductible (subject to income limits for IRAs), earnings grow tax-deferred, and distributions are taxed as ordinary income. Roth accounts use after-tax contributions, tax-free growth, and tax-free qualified distributions. Early distributions (before age 59½) generally incur a 10% penalty plus income tax. Required minimum distributions (RMDs) begin at age 73. Employer plans like 401(k), 403(b), and defined benefit plans have different contribution limits and vesting schedules.
Key Points
- •Traditional: deductible contributions, taxable distributions; Roth: after-tax contributions, tax-free distributions
- •10% early withdrawal penalty before age 59½ (with exceptions)
- •RMDs begin at age 73 for traditional accounts (not Roth IRAs during owner's lifetime)
Exam Tip
Roth IRA distributions are tax-free only if the account has been open at least 5 years and the owner is 59½ or meets another qualifying event.
Frequently Asked Questions
Related Topics
Individual Tax Planning
Individual tax planning involves strategies to minimize a taxpayer's current and future tax liability through timing of income and deductions, use of tax-advantaged accounts, and entity structure decisions.
Trusts and Estates Taxation
Trusts and estates are separate taxable entities that file Form 1041 and are taxed on income not distributed to beneficiaries, while distributed income is taxed to the beneficiaries.
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