[quote=dumbrenter]I do not understand the often repeated claim about 401Ks and IRAs being tax heavy come distribution time.
If I put money in 401K now, I am saving money on taxes I would have paid today (of which I have no choice in matter of taxes).
However, when I draw money when I am old, I could CHOOSE to draw as much to manage my tax bill.
Assuming we still have a progressive tax system 40 years from now, I can draw as much to keep me in a very low tax rate at that time. So why is this option bad?[/quote]
Because if you don’t plan your taxes accordingly, it could be that you are forced to withdraw from your 401k a large amount (and taxed accordingly)… Some folks I know of relatives are running into this issue just now.
There is a minimum withdraw (required minimum distribution RMD) you are required to make after after 70 1/2, based on the amount in the account and life expectancy specified by the IRS. That withdraw is taxed accordingly to your income rate at that point.
If you don’t take your RMD…take note:
If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his or her federal tax return for the year in which the full amount of the RMD was not taken.
It should be noted the 50% penalty is on top of the taxes you own on the RMD amount….Ouch…
