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.

Although there are specific tax rates for given income classifications, the remainder falls into the graduated tax brackets of our current system. This means you fill up a lower tax bracket until it overflows and your next dollars are taxed at a higher rate, and so on. This is crucial when receiving your retirement distributions, because each additional dollar coming from a taxable account costs more to receive, yet must be traded-off against the growth of tax-free accounts.

When you retire, you should have options for income streams. You may want to withdraw from your 401(k), up to a given tax bracket, then pull from your tax-free bucket to top up your income to the amount needed for the year. And, your real estate strategies can be favorable if you actively manage your depreciation and cash flow to get a tax neutral or beneficial position.

A sound retirement strategy ought to have both certainty and flexibility. You should be “certain” as to a minimum amount of income you are “guaranteed,” regardless of market conditions or tax code changes. You also need “flexibility” in order to be able to adjust your distributions based on market conditions and your tax situation for that year.

As you can see, there is more to retirement planning than contributing to your IRA and watching it grow. In fact, you can easily over-fund your IRA when contributions would be better positioned in an alternative type of retirement vehicle. Whether you have started saving, or are one of the many Americans who have thought about it, but done nothing, it is time to begin re-thinking your retirement strategies.

About the Author: Robert T. Boyer, Ph.D., VP of San Diego’s Finest Real Estate and Ryan Ponsford, VP of Crosswind Strategies collaborate with other professional advisors to perform comprehensive, collaborative, integrated financial planning. Their collaborative approach benefits from a synergy of specialties to provide the best planning solution for their clients.

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