1. What is the difference between Tax Deferred Accounts and Tax Free Accounts?
Tax Deferred Accounts (403b, IRA, 457 accounts) are accounts that are covered by IRA regulation. The contributions are made pre-tax, the account grows tax deferred, and the distributions are taxable for Federal and State upon withdrawal. The general rule of these accounts is that the tax are delayed, or deferred, to a later time. There is no provision for the account to be liquidated without the taxes being paid. Each type of Tax Deferred account has specific contribution amounts, and transfer or withdrawal requirements
A Tax Free Account (Roth IRA or Roth 403B) are also accounts that covered by IRA regulation. The general rule is that the money is contributed after the taxes are paid, the growth and distribution is tax free. Tax free accounts are very rare, as they avoid state and federal taxes. There are specific IRS requirements that have to be followed.
2. If I have a Tax Deferred account when do I have to start paying taxes on this account?
Though we would like to shelter our accounts from taxes as long as we want, we can not. Generally, you have to start making distributions and paying the required State and Federal taxes when you reach 70 and half. This rule applies to IRA, Simple IRA, SE. The rule applies to your 403b, 457 or 401k if you are no longer working for the plan-sponsored employer when you are 70 and half. The IRS uses a formula to determine how much you have to withdraw each year.
3. Should I update my retirement account beneficiary designation?
Yes, it is important to understand the tax implication of a beneficiary designation. A spousal beneficiary is the only person who can inherit an IRA and roll that new account into their IRA, and delay the Required Distributions till the inheriting spouse is 70 and half. Non spousal beneficiaries have only two choices- take a lump sum (and pay the taxes now) or move the a account to a inherited IRA.
4. What happens if I don't name a beneficiary? Your account will be subject to the probate laws of the state, and the money will only go your loved ones when the process is complete.