Below you can see a preview on deferred taxes from our partner, Alan Haft, in his new book, “Annuity Secrets Every Investor Must Know. “
“In accounts such as 401(k)s, IRAs and similar vehicles such as simplified employee pension (SEP) IRAs, money has been received but as the account presumably grows in value, taxes are not owed until takes money out.
In laymen terms, taxes are not owed until the owner takes money out is a reasonable way to describe the concept of tax deferment. Weather the account is growing as a result of interest being earned, stocks go up in value, or any number of ways, there’s no taxes owed until the owner withdraws money from the account.
If the owner doesn’t take money out via required minimum distributions (RMD). If the owner ignores these RMD requirements, the IRS will penalize the owner with additional taxes and penalties.
When money comes out of these accounts, it’s taxed as ordinary income, meaning the IRS seems it as income received. In most cases, taxation on income exposes the money to the highest of all possible tax rates, at the time of this writing, depending on one’s tax rate, ordinary income can incur taxes as high as 40% and even higher after state and local taxes are applied.
Money can be taken out of these accounts at any time but if it’s taken out before fifty-nine and a half not only will taxes be owed, but there will be an additional 10% penalty.”
By: Alan Haft Pg. 17