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Chapter 3. Establishing an Income You Ca... > Creating Retirement Income

Creating Retirement Income

One of the most important planning decisions you'll make is how to best generate income for your retirement. Different sources of income have different characteristics and potentially different tax consequences. It's very important to be wise in establishing and maintaining your postretirement cash flow. Here are the various types of income and their representative taxation:

  • Qualified plan investments like pensions, 401(k)s, and non-Roth IRAs. These distributions are generally fully taxable when withdrawn because no tax has been paid on contributions made to the plan. One exception is the Roth IRA, which is not tax deductible when a contribution is made, but all income from the Roth IRA is distributed tax free. Another exception to the common theme of pension benefits being taxed as ordinary income is any after-tax contributions made to your 401(k). If you make these contributions, they are taxed as ordinary income in the year they are deposited, so when you begin to take income, your contributions are returned tax free. However, you are taxed on any growth credited to those after-tax contributions as ordinary income.

  • Nonqualified plan investments. On the opposite side, you have assets that have been invested on an after-tax basis. As these are depleted they are tax free, and the interest, dividend, or capital gains on these assets is taxed accordingly.

  • Nonqualified annuity payments. Payments made to you by an insurance company under an immediate annuity or payments from a deferred annuity contract that has been annuitized are part return of principal and part return of interest on the investment. You'll learn more about annuities in Chapter 9.


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