Navigating Tax Laws: Understanding Tax Deferred Savings Accounts
T ax deferred savings accounts are designed to help you save for the future. The most common type is the Individual Retirement Account (IRA) which allows you to save pre-tax dollars and invest in various types of investments. When employers provide matching pre-tax dollars, the Individual Retirement Account can grow substantially. "You postponed taxes on your contributions and earnings; you didn’t eliminate them." (Source AARP) Withdrawals from these accounts are taxed as income in the year you make the withdrawal. Required Minimum Distribution (RMD) "You must start taking RMDs by April 1 of the year after you turn 73." (Source: AARP). This RMD is calculated based on your age and the balance of your IRA at the end of the previous year. The RMD amount must be withdrawn and included in your taxable income regardless of whether you need the money. Failure to take the RMD can result in a substantial tax penalty. Tax Deferred Savings Accounts t...