Don’t pay
all at once—
and use
these tips to
increase your
nest egg
BY KATHY KRISTOF
THE SMART WAY TO PAY TAXES
ON RETIREMENT SAVINGS
TAX SEASON IS COMPLICATED enough without
your having to worry about retirement
planning. But if you want to maximize your
future spending money, this is exactly the
right time to review the taxes you’re paying—
or not paying—on what you’re saving.
Just ask Phil Holthouse, co-founder of
Los Angeles accounting frm Holthouse Carlin
& Van Trigt. You should never “let the tax
tail wag the investment dog,” he says, but that
doesn’t mean you should ignore the issue,
either. “No one wants to pay more than the
law requires, but a lot of people do,” he says.
Structuring your retirement accounts with
taxes in mind can land you hundreds of thousands of dollars more in spending power. And it can ensure
that you have the right amount of money at the right point
in your retirement.
Preparing fnancially for life after work requires diferent
strategies over the course of your career. You’ll start in the
early “poor but smart” stage, when tax breaks can help you
save more, and eventually graduate to the “fabulous 50s,”
which many believe are your prime savings years: You’ll be
earning more and should have already paid for big expenses,
like your house and college for the kids. To pay the least tax
in each of these periods, you’ll need to diversify your sav-
ings—and your tax burden—right now, so that you’re spread-
ing out what you pay on it. In brief: Put some money into
regular brokerage accounts, which are taxed on a more imme-
diate basis than retirement accounts; put some
money into tax-deferred retirement accounts,
such as traditional 401(k)s and SEP-IRAs, which
allow you to reduce the income taxes you pay right
now; and don’t forget to put some money into
tax-free retirement accounts, such as Roth IRAs, which allow
you to withdraw money later without paying taxes on it.
How much to put where, and when, varies for everyone,
of course, but this three-step primer can get you started on
a smart retirement tax strategy.
STEP ONE
Start out with traditional retirement accounts
Think 401(k)s, SEP-IRAs, and Roth IRAs. When you’re just
getting your business of the ground, you probably believe you
don’t have a lot of money to set aside for retirement. But actually, this is exactly when you should be taking advantage of
tax breaks for your retirement planning. At this stage, investing
in a tax-deferred retirement account like a 401(k) puts more
•
TAX TALONS OUT
Don’t let Uncle Sam snatch
away your fnancial freedom.
Put your money in a variety
of retirement and savings
accounts, paying some taxes
now and some later.
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