Tax Rules on 10 Different Retirement Accounts and Investments
Saving money for retirement involves many factors that can't be controlled, but taxes can be, to a certain extent.


For a tax-conscious investor, finding tax-efficient investments is the key to successfully saving for retirement.
Not everyone thinks about the tax consequences on their investments and trusts that their financial advisers will be knowledgeable before making a recommendation. Often, it is a challenge for advisers to educate themselves on all of the tax laws that affect investments, which can cost you a hefty amount.
Tax laws are complicated and vary based on the different types of investments and retirement accounts. Here are the tax rules on 10 different retirement accounts and investments:

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Traditional IRA, 401(k) or similar accounts
Traditional IRA, 401(k) or similar accounts allow your retirement dollars to grow tax-deferred. Dividends, gains or profits from the accounts aren’t taxed until you withdraw the money.
Taxes are applied on the full amount of any withdrawal you make, unless you made a post-tax contribution. And the tax rate would be your ordinary income tax rate, which is typically higher than the more advantageous long-term capital gains tax rate.
Savers typically make pre-tax contributions to their 401(k)s, therefore anything they withdraw will be taxed. On the other hand, high-income earners who choose to contribute to a non-deductible IRA only owe taxes on tax-deferred earnings on the principal.
If for some reason you have company stock — perhaps in their 401(k) — make sure to transfer it to a taxable brokerage account to receive a Net Unrealized Appreciation (NUA) tax break. Company stock is taxed at a long-term capital gains rate if held for over a year.
2. Roth IRA, Roth 401(k) or similar accounts
Roth IRA, Roth 401(k) or similar accounts are funded with after-tax contributions. They allow your retirement dollars to grow tax-deferred, and withdrawals are tax-free as long as you’re age 59½ or older and the account is at least five years old. In addition, you can withdraw the contributions you’ve made (but not the earnings themselves) tax-free and penalty-free at any time.
3. Annuities
The interest earned from an annuity account is taxed at an ordinary income rate minus the principal. For instance, if you purchased an annuity with $100,000 and in 10 years it is worth $190,000, you would only pay tax on the $90,000 of interest earned. Different rules apply if you bought the annuity with funds from a traditional or Roth IRA or 401(k).
It is more advantageous to purchase an annuity through a traditional or Roth IRA or 401(k) rollover, because those accounts aren’t taxed at a more favorable rate (in comparison to stocks, bonds and mutual funds).
4. Stocks, bonds, mutual funds, real estate
Sales of stocks, bonds and mutual funds that have been held for over a year are taxed at a long-term capital gains rate. These rates will work out in your favor as long as current tax laws don’t change in the future. If you’re single and earn up to $38,600, married filing jointly and earn up to $77,200, or head of household and earn up to $51,700, gains are entirely tax-free up to a certain amount.
Short-term capital gains from sales of investments held for under a year are taxed at your ordinary income tax rate.
5. Dividends
Dividends are the profits gained from stocks. There are two types of dividends, taxed at different rates. Qualified dividends are taxed at long-term capital gains rates, and non-qualified dividends are taxed at an ordinary income tax rate.
To be considered as “qualified,” dividends must be held for a minimum of 60 days during a 120-day period which begins 60 days previous to the ex-dividend date. The ex-dividend date is the day after a company distributes dividend payments to its shareholders.
6. Municipal bond interest
The interest on a municipal bond is not taxed at the federal level, but capital gains from the sale of these bonds can be taxed at the federal level. Interest from bonds issued in an investor's home state is usually exempt from state income taxes, too.
Keep in mind that although municipal bonds are tax-free, interest earned will be factored into calculating Social Security taxation.
7. Pensions
Pensions are taxed at an ordinary income rate, as long as no contributions are made to the plan after tax. If you transfer a pension to an IRA and purchase an annuity, there is no tax advantage besides having the ability to choose when payments begin.
8. Cash value life insurance
Life insurance policies should be structured to maximize the cash value accumulation. Under IRS rules, the cash value withdrawn from a life insurance policy is tax-free as long as it is structured properly and doesn’t become a Modified Endowment Contract (MEC).
9. CDs, savings accounts and money markets
Interest payments on CDs, savings and money market accounts are taxed at an ordinary income tax rate.
10. Social Security benefits
Many people don’t realize that income from Social Security might be taxed. Taxes owed on Social Security income depend on your provisional income, which is calculated as follows:
- Your adjusted gross income — including salary, wages, dividends, alimony and withdrawals from an IRA or 401(k), but excluding Social Security
- plus any tax-exempt interest (i.e., municipal bond interest)
- plus 50% of your Social Security benefits
The worksheet in Publication 915 will determine if any of your Social Security benefits are taxable or not.
If you are in a low or 0% tax bracket, then you will not pay taxes on your Social Security. If your provisional income is between $25,000 and $34,000 as a single individual, or $32,000 and $44,000 as a married couple, up to 50% of your benefits will be taxed. Above those levels, up to 85% of your benefits could be taxed.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Carlos Dias Jr. is a financial adviser, public speaker and president of Dias Wealth, LLC, headquartered in the Orlando, Fla., area, but working with clients nationwide. His expertise spans a diverse clientele, including business owners, retirees, lottery winners and professional athletes with wealth management, tax planning, estate planning, long-term care, annuities and life insurance. Carlos has contributed to Kiplinger, Forbes and MarketWatch, and his work has been featured in CNN, CNBC, The Wall Street Journal, U.S. News & World Report, USA Today and other publications. He’s spoken at various CPA societies across the United States, and Carlos’ presentations often focus on innovative tax strategies, retirement planning and asset protection, providing valuable knowledge to accountants, attorneys and financial professionals.
-
Four Surprising Signs You’ll Never Retire (and How to Fix Them)
Gearing up to retire? If any of these four signs ring true, you may want to make some changes before you do.
-
Stocks Rise After Trump-Powell Fed Tour: Stock Market Today
Nvidia hit a new all-time high intraday, but another renowned semiconductor name and some less iconic stocks were bigger movers Friday.
-
How Divorced Retirees Can Maximize Their Social Security Benefits: A Case Study
Susan discovered several years after she filed for Social Security that she is eligible to receive benefits based on her ex-spouse's earnings record. This case study explains how her new benefits are calculated and what her steps are to claim some of the money she missed.
-
From Piggy Banks to Portfolios: A Financial Planner's Guide to Talking to Your Kids About Money at Every Age
From toddlers to young adults, all kids can benefit from open conversations with their parents about spending and saving. Here's what to talk about — and when.
-
I'm an Investment Pro: Here's How Alternatives Could Inject Stability and Growth Into Your Portfolio
Alternative investments can often avoid the impact of volatility, counterbalancing the ups and downs of stocks and bonds during times of market stress.
-
A Financial Planner's Guide to Unlocking the Power of a 529 Plan
529 plans are still the gold standard for saving for college, especially for affluent families, though they are most effective when combined with other financial tools for a comprehensive strategy.
-
An Investment Strategist Takes a Practical Look at Alternative Investments
Alternatives can play an important role in a portfolio by offering different exposures and goals, but investors should carefully consider their complexity, costs, taxes and liquidity. Here's an alts primer.
-
Ready to Retire? Your Five-Year Business Exit Strategy
If you're a business owner looking to sell and retire, it can take years to complete the process. Use this five-year timeline to prepare and stay on track.
-
A Financial Planner's Prescription for the Headache of Multiple Retirement Accounts
Having a bunch of retirement accounts can cause unnecessary complications. Consolidation can make it easier to manage your savings and potentially improve investment outcomes.
-
Overpaying for Financial Advice? A Financial Planner's Guide to Fees
Take five minutes to review how much you're paying for financial advice. If you're overpaying, you could be better off with an adviser who charges a flat fee.