Taxes are probably the greatest threat to your financial success during retirement. It's not what you make and save that is important, it's what you keep. There are three main "buckets" of taxation -Tax-Now, Tax-Later and Tax-Advantaged.



The Tax-Now bucket is where contributions are made with After-Tax dollars, meaning that taxes have already been paid on the principal. Any earnings generated from these accounts are subject to taxation each year that the earnings are realized, and taxes must be reported and paid annually. Banks will usually issue a 1099-INT statement for bank accounts each year, while CDs will issue a 1099-INT when the term ends. If you sell a stock and realize a gain, you will receive a 1099-B, while mutual funds will issue a 1099-DIV for dividend distributions that will be taxed as ordinary income, even if you don't sell the mutual fund. If you sell a mutual fund and realize a gain, you will also receive a 1099-DIV from the IRS.

A realized gain occurs when an asset such as a stock, bond, or real estate is sold for a price that is higher than the original purchase price. If an asset is held for one year or less before being sold at a gain, it will be taxed as ordinary income. If the asset is held for more than one year, it will be taxed as a long-term Capital Gain, which is generally taxed at a lower rate than ordinary income tax.

It is worth noting that if any of these accounts, including mutual funds, are held in a Qualified Plan like an IRA or 401k, you will not receive any 1099 forms, and these accounts will be classified under the Tax-Later bucket.


Contributions in the Tax-Later bucket are generally made with Pre-Tax dollars, which means you haven't paid income taxes on the principal yet. For employer-sponsored retirement plans like a 401k or a 403b, the contributions are automatically deducted from your paycheck and aren't considered taxable income on your W2 for that year.

On the other hand, for individual retirement accounts such as IRAs, SIMPLE IRAs, and Keough plans, deductions are made when you file your income taxes each year.

These plans, including 401k, IRAs, and 403b, are categorized as Qualified Plans, which means the contributions are Pre-Tax dollars and tax-deductible in the year of contribution.

However, if you withdraw your money from these plans before you reach age 59 ½, the IRS will charge you an early withdrawal penalty of 10%, and you'll have to pay income taxes on the distribution based on your current income tax rate.

Although Tax-Later plans may appear to be an attractive option, there are various drawbacks that need to be taken into account. 

Firstly, the IRS requires you to begin taking Required Minimum Distributions (RMDs) from your Qualified Plan no later than age 70 ½, and failure to do so can result in a 50% Excise Tax. 

Secondly, distributions from Qualified Plans may lead to taxation of your Social Security, a little-known fact that can significantly affect your anticipated retirement income. We will delve into this topic in more detail later. 

Thirdly, if you invest money directly into an annuity that is not under a Qualified Plan, such as a 403b, the contributions are after-tax and are not tax-deductible, yet they are still considered Non-Qualified and fall under the Tax-Later category, making them subject to the 10% penalty for distributions before age 59 ½. 

Lastly, unlike stocks, bonds, real estate and other assets, Tax-Later vehicles are not Tax-Advantaged, and any distributions from them will be taxed as Ordinary Income at the time of distribution, even if they have been held for more than one year. 


Tax-Advantaged accounts differ from Tax-Later accounts in several key ways. 

Contributions to Tax-Advantaged accounts are made with after-tax dollars, which means that the earnings on these accounts are not subject to income tax either at the time of gain or during retirement distribution. 

Although income tax is paid on the initial contribution, no tax is due on the funds received upon distribution. In addition, distributions made prior to age 59 ½ are not subject to the IRS 10% penalty and are exempt from Required Minimum Distributions because income tax was already paid on the contributions.

Another benefit of Tax-Advantaged accounts is that distributions from them do not impact your Social Security benefits. This makes them a great option for achieving a tax-free retirement. 

Life insurance is considered tax-advantaged for several reasons: 

Tax-Advantaged accounts include Roth IRAs, Section 529 College Plans, and Life Insurance, among others.

        TAX NOW                                                                                         TAX LATER                                                                           TAX ADVANTAGE