BY STEPHEN KYNE<\/p>\n
We’re smack dab in the middle of tax
\nseason, which means, for many of us, that
\nwe’re reviewing what actions we could have
\ntaken last year to improve our tax liability
\nposition.<\/p>\n
Part of that review should include a look
\nat your retirement savings contributions
\nand how they are treated for tax purposes.
\nWith so many different types of retirement
\naccounts out there, how can you know where
\nbest to save? Let’s review some basics.<\/p>\n
Seed vs. Harvest:
\nAll qualified retirement plans generally
\nfall into two categories for the purpose of
\ntaxation.
\nThe first category includes those accounts
\nin which only the “seed” money is
\ntaxed, yet the “harvest” grows tax-free.
\nThis is to say that only your contributions
\nare taxed, before being contributed to the
\naccount, but everything those contributions
\ngrow to become will be tax-free to you in
\nretirement. These accounts include a Roth
\nIRA, Roth 403(b) and Roth 401(k) – the
\nword “Roth” should be your clue.<\/p>\n
These types of accounts won’t generally
\nreduce your tax liability today but, since
\nyou have tax-free access to the growth
\nin retirement, they can go a long way to
\nreduce your future tax liability at a time
\nwhen making your assets last will be your
\nparamount concern.<\/p>\n
The second category includes those
\naccounts in which the “seed” money is
\ntax-free, but the “harvest” grows to be fullytaxable
\nwhen you withdraw it in retirement.
\nSo, the upside is that you’ll get a tax break
\non your contributions in the current year,
\nbut everything those contributions grow to
\nbecome will be taxable to you in retirement
\nas if it was any other income.<\/p>\n
We call these tax-deferred accounts.
\nThese accounts include Traditional IRAs,
\n401(k)s, 403(b)s, SEPs, SIMPLE IRAs, 457
\nDeferred Compensation plans – generally
\nthe non-Roth plans available to you through
\nyour employer.<\/p>\n
What’s the best plan for you? The answer
\nis: it depends.<\/p>\n
The old paradigm was that people would
\nspend less money in retirement, therefore
\nthey would be in a lower tax bracket, meaning
\nthat tax-deferred accounts would be
\nmore beneficial since you get a tax break
\non the contributions and the withdrawals
\nwould be taxed at, assumedly, a lower rate.<\/p>\n
Today, people are retiring and finding
\nthat they want to do things with their
\ntime, and those things cost money. The old
\nparadigm is breaking down as retirees spend
\nmore time and money traveling, buying
\n“toys”, and generally enjoying themselves.
\nMany are finding themselves in the same or
\nhigher tax bracket in retirement, meaning
\ntax-deferred accounts are being hit hard
\nby taxes.<\/p>\n
Diversification doesn’t just mean a mixture
\nof types of stocks and bonds anymore,
\nit is equally important to diversify the way
\nyour retirement income will be taxed in
\norder to have more control over your tax
\nliability in retirement, to help ensure your
\nretirement assets last as long as you do!
\nContributing to a mixture of retirement
\naccounts can help accomplish this goal.<\/p>\n
Rules of thumb: Contribution hierarchy:<\/p>\n
1. If your employer offers you a match on
\nretirement plan contributions, always try
\nto contribute to the match. For example, if
\nyour employer will match your contributions
\nup to 3 percent of your salary, try to contribute
\n3 percent. Regardless of the taxation in
\nthis account, where else will you be able to
\ndouble the value of your contribution in one
\nyear? Take the free money.<\/p>\n
2. Once you’ve contributed to the match,
\ncontribute to a Roth IRA if you’re eligible.
\nYour contributions to a Roth IRA can be up
\nto $5,500 with an extra $1,000 as a catch-up
\ncontribution if you’re over age 50. Contribution
\nlimits are more restricted for Roth
\nIRAs because the impact of tax-free growth
\nis so high. In short, the growth is money the
\ngovernment won’t be taxing in the future,
\nso it’s in the interest of the government to
\nlimit how much you can contribute.<\/p>\n
3. If you’ve contributed to the match in
\nyour employer-sponsored plan, and you’ve
\nmaximized your eligible Roth IRA contributions,
\nthen you should consider contributing
\nmore to your employer-sponsored
\ntax-deferred plan. Contribution limits
\nrange from $12,500 (with a $3,000 catchup)
\nfor SIMPLE plans, to $18,000 (with a
\n$6,000 catch-up) for 401(k)s, 403(b)s, 457
\nDeferred Compensation plans, SARSEPs.
\nCertain plans could even accept contributions
\nas high as $210,000.<\/p>\n
Of course, these are just rules of thumb
\nand you should be working closely with your
\nfinancial advisor and tax advisor to determine
\nthe most effective way to save for your
\nretirement while maximizing and balancing
\ntax-efficiency for today, and keeping an eye
\non your needs in the future.<\/p>\n
Once retired, the actions you take today will
\nhelp determine whether your assets will be
\navailable to support you for your lifetime.<\/p>\n
Photo Courtesy Sterling Manor Financial<\/p>\n","protected":false},"excerpt":{"rendered":"
BY STEPHEN KYNE We’re smack dab in the middle of tax season, which means, for many of us, that we’re reviewing what actions we could have taken last year to improve our tax liability position. Part of that review…<\/p>\n","protected":false},"author":88,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[67,84,133],"yoast_head":"\r\n