***Disclaimer: These are general rules written by a lawyer for purposes of designing your estate plan. Consult with your CPA for specific income tax advice.
There are many types of income tax deferred retirement accounts including 401(k), 457(b), 403(b), and Individual Retirement Accounts. For this FAQ we will collectively refer to all of these types of accounts as IRAs. Tax deferred means that income tax is not due until the money is later withdrawn for retirement. In a non-tax deferred, or regular savings account, if the income was 100 and the income tax 30% that would leave 70 to be invested compared to a tax deferred account where all 100 of income is invested. This allows the account to accumulate faster however, income taxes are paid later when the money is withdrawn and If money is withdrawn before 59 ½ years old, there may be penalties for early withdrawal in addition to the income taxes owed.
At age 70 ½ years old, the owner of the account is forced to start taking money out of the IRA and paying income taxes on the amount withdrawn. This is called required minimum distributions (RMDs). The percentage, or rate of withdrawal increases with age.
The tax rate a person pays will depending on their tax filing status, which could be single, married or married filing separately. The rate or percentage of tax increases as the total income increases.