When it comes to saving for retirement, you can decide how you're taxed and when
When it comes to saving for retirement, you can decide how you’re taxed and when
Look, I’ve been beaten, subdued, rendered immobile with duct tape and held hostage by a goon with a shaky finger poised on the trigger of a nail gun. So you ask if I’ve been taxed before? The answer is an unequivocal “yes.” The life of a gumshoe is nothing if not taxing.
As we trudge up the hill, Lenny, the former object of my investigation, leads me toward one of the more taxing episodes of my life.
Most of us don’t get to decide when our stamina is tried and our fortitude tested, but when it comes to saving for retirement, you can decide how you’re taxed and when.
I’d been imprisoned underground with Lenny after having pursued the thief for years on a casino magnate’s dime, the same guy that Lenny had been stealing from with his crooked cheats and card counting ways. I get paid well for the work, but a guy can still complain about the conditions can’t he?
How to take your lumps now
An investor holding securities in an account without any special tax treatment is said to be holding a taxable investment.
Were Lenny’s winnings truly above board, he’d have paid income taxes on the money; instead he had chosen to lead me to his hidden fortune, giving me half of it in exchange for his freedom. We’d made our escape, and now it was time to pay up. He never once questioned my faith in his promise of treasure.
When you don’t plan, you get what you get.
Taxable accounts are taxed annually on realized gains, dividends and interest, and oftentimes they suffer reduced returns because of this. Funds in taxable accounts often don’t have the same restrictive disbursement rules as other types of accounts, thus allowing for more freedom and liquidity. Many investors choose to hold emergency savings in these kinds of accounts to allow for quick access if necessary.
Save it for later
Those who expect to be in a lower tax bracket in retirement than in their working years often choose to save before paying income taxes on the money. This can be done using retirement accounts like the 401(k), Traditional IRA, SEP, SIMPLE IRA, 457 and 403(b) plans created specifically for use as retirement savings tools.
Lenny has similarly deferred taxation on his gambling treasure by hiding it from the IRS (and pretty much everyone else), though the metaphor ends there, as Lenny likely had no plans to announce his trove in retirement and subject it to proper taxation.
Saving money into these accounts means not having to pay income taxes up front, when tax rates may be higher, in favor of paying taxes on the distributions in retirement when tax rates may be lower. No taxes are owed on earnings in the account until distributions occur, allowing for compounding growth absent taxation.
If these folks end up in a greater income tax bracket than expected in retirement, well tough luck.
And don’t even try to access the money in these accounts before 59½, with only a few, distinct exceptions, early distributions will be subject to a 10 percent federal penalty.
Save it for never
Very few opportunities exist for totally tax free income, but Roth IRAs and college savings plans are two of them.
Post-tax savings fund Roth IRAs in anticipation of higher tax rates in retirement, and growth in the account can be taken tax-free in retirement (assuming adherence to some not-so-onerous stipulations).
Some college savings plans may allow for state income tax free contributions, tax deferred growth, and then entirely tax-free distributions if the money is used for qualified education expenses for the beneficiary.
After interminable hours navigating some unseen path through briar patches and thick underbrush in the tenuous light of the moon, Lenny stops, panting. Bent over, he looks ahead, uncertainly sizing up a thicket of sagging willows in the distance. Without a word, he drops to his knees and sinks his fingers into a fresh patch of loam, digging furiously until he uncovers a white trash bag, lumpy with stacks of rectangular edges pressing tight against the plastic.
Like old money, taxed and spent, I crumple, hugging my knees, leaning back against the trunk of a tree, folding into myself at the sight of the casino magnate and four thugs lumbering out from the copse of trees in the distance. They make their approach in near silence, while Lenny brushes dirt from folds in the bag, too busy to notice the thugs and their automatic weapons, black metal, gleaming.
Soon it’s time to tell Lenny that his nemesis is still my employer.
You’re welcome to hike back Into the Noir with us again, and if we get out of here alive, just know that you’ll be in good company.
Anthony M. Conte, MSFS, CFP is a managing partner with Conte Wealth Advisors LLC in Camp Hill, 717-975-8800, firstname.lastname@example.org. Registered Representative Securities offered through Cambridge Investment Research Inc., a broker/ dealer, member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors LLC are not affiliated.
The opinions expressed in this column are solely the writer’s and do not reflect the opinions of PennLive.com or The Patriot-News.
Before acting on any financial advice, readers should consider whether it is suitable for their circumstance and consider seeking advice from a financial or investment adviser.