How to Keep The Tax Man Away From Your Retirement Fund
Expert Reveals Ways to Keep More For Your Nest Egg
As the year winds down, many people will start thinking about their tax bill, and so will Uncle Sam -- specifically, your retirement fund.
But it doesn't have to be that way. Rick Rodgers, a Certified Financial Planner and Certified Retirement Counselor, believes that with some simple adjustments, consumers will be able to pay less in taxes and keep more for their golden years.
"The IRS sees a huge amount of collective dollars-$17 trillion, to be exact-stashed away in IRAs and retirement savings," said Rodgers, author of the new book The New Three-Legged Stool: A Tax Efficient Approach To Retirement Planning (www.TheNewThreeLeggedStool.com). "This has caused the IRS to become very aggressive in taxing those assets. While you might not think the IRS is after your retirement money, they actually have a big red bull's-eye painted on your retirement plan. As of September 2010, our country's national debt totaled more than $13.5 trillion (and the number continues to rise by $2 million every minute!). That amounts to $121,600 of debt for each taxpayer in the United States. Yet this is a mere drop in the proverbial bucket compared to what the government will owe in benefits to Social Security and Medicare recipients far into the future, as well as in pensions to military and civilian government workers."
Rodgers suggested a few ways to help bolster your retirement savings with some simple adjustments:
* Roth IRA -- The smartest move a younger person can make is to invest in a Roth IRA. A person who starts saving $5,000 per year in a Roth IRA at age 20 will have over $1.3 million at age 60 if it grows at eight percent. Provided the person has followed the rules, he won't owe the IRS a nickel on any of the money. Many taxpayers, young and old, find it difficult to give up the immediate tax savings they'd receive if they chose to make a traditional IRA contribution that's deductible. In the example above, if the same person contributed to a traditional IRA, the entire $1.3 million would be taxable. He'd have saved about $50,000 in taxes along the way but would owe over $200,000 in taxes when he tried to spend any of the money.
* Examine Your Choices -- I have people coming into my office all the time with a retirement mess, and I have to ask them why they made certain choices. More often than not, they say it's because that's what someone who retired before them did. Yet the circumstances of each retiree are unique. You want to make the right choice for you, and that choice may be something completely different than what a coworker did.
* Net Unrealized Appreciation (NUA) -- If you have company stock in a 401K you are ready to withdraw, take a look at your options. The appreciation on the stock qualifies for capital gains tax treatment if it is handled properly. The stock is moved to a taxable account and you pay ordinary income tax on your cost. The appreciation is not taxed until you sell the stock. The gain is taxed at long-term capital gains rate. For instance, if you had $300,000 of company stock in your 401(k) account, if you paid ordinary taxes, you'd owe about $100,000 in taxes. If you took the NUA option and had a cost of $100,000 in the stock, you'd owe about $65,000.
"People can save money on their retirement savings by looking at what I call the legs of the new three-legged stool," Rodgers added. "Leg one is Tax-Deferred Savings, Leg two is After-Tax Savings and Leg three is Tax-Free Savings. All these options exist for most people saving for retirement, and by examining all of those options now, you'll be able to keep more -- and give less to Uncle Sam -- later."
About Rick Rodgers
Rick Rodgers, CFP® is an author, keynote speaker, wealth manager and president of Rodgers & Associates, "The Retirement Specialists," in Lancaster, PA. Rick's articles on retirement planning have appeared in Wealth Manager Magazine, CPA Magazine and Physician's Money Digest. He also writes a column for Lancaster County Magazine titled "It's Your Money."