Taxes Should Have You Re-Thinking Your Retirement Strategy

By Robert T. Boyer, Ph.D. Have you given any thought to funding your retirement? If you are like most Americans, you have received plenty of advice from well-meaning co-workers and possibly even financial professionals, but you have done little to start saving. Times and the rules have changed; now you should consider yourself entirely responsible for your retirement. It is not only time to begin acting on your retirement strategies, but to understand the critical role that taxes play and why you should perhaps re-think your strategies entirely. Like all laws, the tax codes are used to promote public policy. Giving tax breaks to certain classes of income encourage the actions that generate those types of income. E.g., 1031 tax deferred exchanges encourage continued investments in real estate while short-term capital gains discourages churning investment portfolios. Despite a thorough understanding of the value of diversification and asset allocation, unfortunately, many advisors fail to consider the tax ramifications of the savings and, later, the retirement distribution options. Tax planning can easily make 5-8 ½ years, or more, difference in how long your retirement dollars will last. You need to consider both the income classification (e.g., earned, passive, etc.) and the tax rate. The income classification matters because different classifications provide for tax deductions. E.g., you could receive $200,000 per year in passive income, but match it with $200,000 or more in passive (paper) losses such that you have zero net taxes. But, $200,000 in earned income cannot so easily be offset….

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Tax Implications of Retirement Accounts

There are several retirement accounts with tax implications. 401K accounts, Keogh accounts, Roth IRAs and standard IRAs are some of the most important and widely know retirement accounts.  What is an Individual Retirement Account (IRA)?  An Individual Retirement Account (IRA) is a retirement investment into which you put contributions on which you do not pay taxes until you withdraw the money from the account after you retire. Usually, your tax bracket will be lower after retirement and so you won't have to pay as high a percentage of the money in taxes as you would have if the money had been taxed at the time it was originally earned. When you put money into an IRA, you get a tax deduction. When you take a "distribution" from that IRA later, it counts as taxable income. There are penalties for early withdrawal up to age 59 1/2.  You are required to start taking money out of your IRA no later than at age 70 1/2.  You should check with your accountant or the IRS to see how much you can contribute in the current tax year. How much of this money is tax deductible depends on your Adjusted Gross Income (AGI) and whether you are covered under an employer retirement plan.  There are other variations of the standard IRA, such as the "Simple IRA," a relatively new but popular employer based plan allowing employer contributions and a higher contribution by the taxpayer.  What is a 401K Retirement Account?  A 401K plan…

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