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Tax Planning & Preparation

Your Retirement Savings and Taxes

With tax-defered retirement vehicles such as 401K plans and traditional individual retirement accounts (IRAs), you can hold off paying taxes until you withdraw the funds.

However, when you withdraw you have to pay taxes at ordinary income tax rates, regardless of whether the income is attributable to long-term capital gains or dividend income. So what do you do?

Taxable Accounts

Put stocks that generate dividend income as well as growth stocks into taxable accounts. While you’ll pay income taxes as you go, the tax rate will be much lower.

Deferred Payments

Put retirement investments generating ordinary income, such as taxable bonds, into a tax-deferred account. You’ll pay taxes on the investment at ordinary income rates whether it’s in a tax-deferred or taxable account, but this way you can defer payment.

401Ks and IRAs

Keep contributing to your 401K or IRA. Contributions to those accounts are made from pre-tax dollars.

Money you invest in a taxable account is made with after-tax funds, so you only contribute perhaps 65 or 75 cents on the dollar. Meanwhile, the entire dollar goes into your 401K or IRA, which makes those tax-deferred accounts tough to beat over the long term.

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