Making the most of your retirement savings

December 19, 2006 at 4:05 pm Leave a comment

It’s absolutely crucial that we understand the differences between tax-deferred and tax-free when it comes to our retirement options. Tax-deferred plans like a 401(k) and traditional IRA can be eaten up by taxes if you’re not careful. Of course, if you have a large enough amount in those accounts, it might not be an issue. Still, why give the IRS more of your hard-earned money than you should? CNN Money offered some ideas on how to sidestep IRS traps, legally.

Put the least-tax-efficient assets in your IRA. It’s not about how large you can grow the account, but how efficiently, in terms of taxes, you can take advantage of compound interest. There are a variety of tax implications with specific types of stocks and funds within your savings. Seek a financial planner that is willing to teach you how this works, what types of accounts will best fit your situation, and how you make the most of your retirement dollars.

Start taking distributions before you have to. This will enable you to avoid the tax bracket jump. The IRS forces you to withdraw from IRA’s at the age of 70 1/2, but you can actually withdraw funds, penalty-free, at 59 1/2. To avoid jumping tax brackets, take the withdrawals when you can and reinvest them into tax-free savings, specifically, Roth IRA’s. If you don’t qualify for a Roth, tax-sheltered annuity trusts are a great option.

Reinvest IRA payouts to avoid taxes. In only one case can your retirement accounts be handed over to a beneficiary upon your death without being forced to take contributions and pay taxes. If you have children as benificiaries, it’s a good idea to shift that money into a Roth as well as setup a trust for them.

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Source: CNNmoney “Three moves to save your retirement fund”

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Entry filed under: Retirement, Saving and Investing.

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