Don't forget taxes in retirement plans
BY AP Wire Service
Sunday, May 13, 2012
5/13/12 at 3:51 AM
You've taken advantage of the upfront tax breaks of traditional retirement savings accounts and amassed a tidy sum during your working years. But once you tap those accounts in retirement, you have to deal with a nasty surprise: Uncle Sam wants his share - and that cut can be painful.
Say you're retired, plan to buy a new car for $30,000 and have all of your savings tied up in a traditional IRA or 401(k) plan. If you're in the 25-percent tax bracket, you'll need to withdraw $40,000 to have enough after-tax money to buy that $30,000 car. Ouch!
Throughout the 30-plus-year history of IRAs and 401(k) plans, workers have been encouraged to put off the tax bill until retirement, when they'd be in a lower tax bracket.
But some retirees find themselves in the same or an even higher bracket once they lose the substantial tax breaks for contributing to their retirement accounts.
One of the cardinal rules of investing is to minimize risk by diversifying your money across a broad range of assets. Now, some financial advisers recommend you diversify the taxability of retirement assets by spreading them among taxable, tax-deferred and tax-free accounts to manage cash flow during retirement.
Withdrawing assets in a tax-efficient way will not only reduce your tax bill but also allow your remaining assets to last longer. The time to plan for the impact of taxes in retirement is while you are working and can still do something about it.
If you don't plan ahead, taxes can take a big bite out of your spendable retirement income.
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