Are You Missing the Retirement Savings Boat?
Monday, February 13, 2012 at 8:00AM | Julie E. Hall, CFP® 
You might think you’re saving smart. Cash flow permitting, many responsible savers pick the default and defer 100% of their annual retirement plan savings to a pre-tax retirement account (i.e. 401(k), 403(b)). For 2012, the maximum deferral to a 401(k) plan is $17,000, in addition to $5,500 in annual catch-up contributions for anyone 50 and older. Although this helps to reduce the tax bite today, when you retire, your retirement assets would be 100% taxable!
When was the last time you reviewed your current retirement savings strategy? It makes sense to save into other types of investment accounts that should be incorporated into your overall retirement plan savings strategy. There are three main types of retirement investment accounts:
Tax-Free Investment Accounts
Pre-Retirement - Contributions to these accounts are made with after-tax dollars. Income generated pre-retirement within these accounts is not taxed (provided certain qualifications are made).
Post-Retirement – Upon retirement, income taken from these accounts for retirement income needs is tax-free.
Taxable Investment Accounts
Pre-Retirement - Savings into these accounts are made with after-tax dollars. The dollars do not grow tax-free. Any income generated within the account (i.e. interest, dividends, capital gains, etc.) is taxable income each year.
Post-Retirement – Upon retirement, only gains are taxable (currently at favorable capital gains rates if securities/funds sold are held for more than one year).
Tax Deferred Investment Accounts
Pre-Retirement - Money goes in on a pre-tax basis.
Post-Retirement – Upon retirement money comes out 100% taxable.
How to get on board: A real world example:
Max is 45 and feels that tax rates are going to be much higher in his retirement years than they are today. In 2012 Max meets with his financial advisor. Max feels comfortable allocating $17,000 annually from cash flow for retirement. Max currently earns $100,000 per year. Max’s company offers him a 4% maximum matching contribution. Meaning if Max defers 4% ($4,000) of his income his company will match him up to 4% or $4,000. Rather than maxing out his 401(k) Max is considering the following:
401(k): $4,000 plus company match of $4,000 = $8,000 total to 401(k) plan – Max has utilized his full matching contribution offered by his employer.
Roth IRA: $5,000 contribution (Max’s income is under the beginning phase out amount for 2012 of $107,000 and can contribute to a Roth IRA).
Taxable Investment Account: $5,000
Permanent Life Insurance: $3,000 - Because Max is a single father and needs life insurance, he is allocating $3,000 to permanent life insurance that is conservatively managed (meaning it provides enough death benefit in the event he dies prematurely as well as cash value which can be used towards retirement on a tax favored basis).
By doing this Max is definitely utilizing various tools to meet his specific goals. By diversifying his retirement savings today, he is creating a plan designed to help his retirement income be as tax efficient as possible.
To see a detailed list of the different types of investment accounts and their tax status you can review the link below provided by Keebler & Associates LLP:
http://www.keeblerandassociates.com/files/Tax%20Asset%20Buckets.pdf
The investment profile is hypothetical and the decisions are presented only as examples and are not intended as investment advice. Please consult your financial Advisor if you have questions about these examples and how they relate to your own financial situation.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisers of RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Investment mentioned may not be suitable for all investors.
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