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Year-End Financial To-Do List

By on December 1, 2020

Yep, 2020 is almost over.  (I know, many of us are saying thank goodness!)  There’s so much going on in December that it’s difficult to find time for the important, but none urgent items.  Here are a few important financial items that it would be good to take a look at.

Holiday Debt

It’s so easy this year to just click a mouse button and send a gift to someone.  This is certainly the time for such things.  The caution is that a little budgeting in December, can help you get off to a debt-free 2021.  Even if you don’t have a formal budget, you can at least look at your cash flow and savings and think about how much debt you can pay off entirely when the bills roll in in January.  You can get some additional ideas on this from my previous article Budgeting for the Holidays.

2021 Budget

Think how much easier it would be to budget for the holidays (and other expenses) if you had an actual budget to refer to.  How detailed you want to be in your budgeting process is a personal decision.  Some clients have spreadsheets that offer up-to-the-minute expense summaries.  Some people still have envelopes filled with cash – one for groceries, one for rent and so forth.  My article How to manage expenses in retirement has some good tips whether you’re already retired or not.

Reducing Interest

Why not go into 2021 with a plan to pay down your high-interest debt and minimize you mortgage costs?  Credit cards are always worthy of debt retirement because their rates are so high.  My article Using Credit Cards Wisely includes a discussion of the importance of paying off your debt monthly.  A companion article talks about Another Reason to Eliminate Credit Card Debt.  In terms of your mortgage, the interest is always a significant expense, so it’s well worth keeping an eye on rates which are still historically attractive.  My articles Reducing Your Monthly Mortgage Payment and Should I Refinance My Home?  Can help you evaluate this.

Finances and Your Spouse

Do you and your spouse regularly sit down and discuss finances?  This can help align your goals, reduce financial tensions in your marriage and prepare each of you to take over if one of you is incapacitated or dies.  I recommend scheduling a monthly meeting on this subject for next year (and beyond).  How about just agreeing to go over things the first Sunday of every month over brunch or something enjoyable?  Here are a few articles to get you thinking about these meetings:  Talking Money with Your Partner, Financial Preparation for the Loss of a Spouse and The Role of a Financial Advisor When a Spouse Dies.

 Savings

Unless you’re struggling with a job loss, you may have been able to save a little more in 2020.  Maybe you had a staycation.  Maybe you didn’t go out to eat or catch a movie.  Maybe you didn’t hit the stores so much (or at all).  Whatever your situation, it makes sense to look at the dollars you didn’t spend and consciously target them toward specific goals.  Maybe increased retirement savings if your employer reduced his contributions.  Maybe replenish your rainy-day or emergency funds if you had to use them this year.  Whatever your savings goals are, unspent 2020 money is an opportunity for you.

Financial Advisor

It’s always a good idea to have an expert go over your plans with you and discuss any potential revisions.  (Or maybe even develop your first formal plan.)  You might check out my article The Value of a Financial Advisor to get some ideas.  The key thing is to make an appointment to do this now.  Whether you actually get together before or after the holidays is not that important.  The important thing is planning to do this.

I really encourage you to find some time to consider these suggestions.  They’ll make your financial success in 2021 so much brighter.  No matter which topic you want to drill down on, we can discuss this in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Comprehensive Financial Planning

By on November 1, 2020

Your financial well-being depends on a number of factors and they’re all important.  For example, suppose you don’t properly understand how much you need for retirement and you consequentially run out of funds near the end of your life.  Or, suppose your savings are on track, but that a major medical event or a liability lawsuit depletes your savings.  Or, maybe you haven’t reviewed your investments for a while and your asset allocation is now not what you planned for and a fall in the market leaves you overexposed.  There are numerous examples of why it’s important to do comprehensive financial planning from time to time.  The figure below identifies the areas that are typically covered in such a review.  Let’s take a brief look at each area.

Cash Flow.  Some people have substantial investments, but they’re not liquid enough to meet current expenses.  When discussing cash flow, it’s common to go over emergency savings, reducing credit card and other high-rate debt, making sure that income can cover essential expenses and a developing a spending plan.

Insurance.  Many of us think primarily of health insurance when insurance comes up.  That is important – especially catastrophic health insurance.  However, life insurance, disability insurance, liability insurance and long-term care insurance are vitally important too.  Covering all of your insurance needs can give you peace of mind and protect your hard-earned investments.

Tax Planning.  Naturally the goal of tax planning is to minimize your taxes so as to retain as much of your income as is possible.  Last month I wrote an article on tax planning that you might like to review.  During a tax-planning discussion, it’s typical to talk about your various sources of income and the tax-deferred investment options that might fit into your portfolio.

Retirement Planning.  In retirement planning, you estimate your retirement expenses and plan out how to save enough to cover them.  In addition to identifying savings targets, you’ll typically review IRAs, employer plans (401(k), 403(b), etc.) and deferred compensation.  Finally, a review of Social Security, pensions and other income sources round things out.

Investments.  Investments are, of course, at the heart of your financial plans.  Reviews in this area typically include asset allocation, tax efficiency, diversification and the impact of the economy on financial markets.

College Funding.  If you’ve got kids (or maybe grandkids), this can be a very important topic considering the cost of higher education.  Discussions often include your current savings for college, ways to accumulate the desired funds (such as the use of 529 plans) and how to pay off any loans after graduation.

Estate Planning.  This discussion includes much more than how much you want to leave to whom — which is typically covered in wills and trusts.  It also covers healthcare directives, final arrangements, how best to title your assets and any legacy contributions you hope to make.

Other Goals/Planning.  The previous categories cover most of the important topics, but there may well be some other areas that are specific to your situation.  These might include purchasing a second/vacation home, travel plans, how to handle inheritance and other sudden-wealth situations and so on.

I hope you can see the importance of a comprehensive financial review.  We can get you started on this or discuss other financial matters in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Tax Planning 2020

By on October 1, 2020

Believe it or not, we’re about three months from the end of the (calendar) tax year.  However, there’s still time to lower your 2020 taxes.  Here are some commonly used approaches to reducing taxes.

Lower Your Income via a Tax-Deferred Savings Plan

Tax-deferred savings plans let you reduce your Adjusted Gross Income by the amount that you contribute AND they help you prepare for retirement.  The most common savings plans are 401(k)s and traditional IRAs.  You can check out an article on this that I wrote back in March.   Briefly stated, you can reduce your income by the amount you contribute — subject to contribution limits, your current age and, in the case of IRAs, income levels.  A bonus is that the growth on these investments is also tax-deferred until withdrawals begin (usually in retirement).

Find Deductions

Tax deductions reduce the amount of income used to calculate your taxes.  Some common deductions for working individuals include:  mortgage interest, student loan interest, medical expenses, state and local taxes, Health Savings Account contributions and charitable contributions as well as the tax-deferred savings plans discussed above.

Utilize Tax Credits

Tax credits reduce the taxes you owe.  Interestingly, they actually have a bigger dollar-for-dollar effect on your tax bill than deductions do.  Some common tax credits for working individuals include:  child tax credit, child and dependent care credit, earned income tax credit (for those with low or moderate income), savers credit (for those who make retirement plan or IRA contributions and have low or moderate income), plug-in electric vehicle credit and residential energy credit (solar panels) among others.

Watch for Break-Points in Tax Brackets

You probably know that we use a progressive tax system which means that your income is divided into buckets that are taxed at increasingly higher rates.  For 2020, the tax rates are as follows for couples who file jointly.

Tax Rate Income Range
10% $0 to $19,750
12% $19,751 to $80,250
22% $80,251 to $171,050
24% $171,051 to $326,600
32% $326,601 to $414,700
35% $414,701 to $622,05
37% $622,051 or more

So, if your taxable income (income after deductions and credits) turns out to be $85,000 in 2020, the tax on the first $19,750 is $1,975.  The income on the next bracket is $7,260.  And the tax on the remaining $4,749 of your taxable income is $1,045.  So, it would be good to avoid the higher tax rate on the $4,749 if possible.  One strategy is to move that income into next year if possible (called income shifting).  To do this, some people are able to defer salary and or bonus payments until the following year.  In addition to income shifting, you could revisit your deductions and tax credits.  Have you contributed the maximum permissible amount to your 401(k) and IRA?  Does your employer offer Flexible Spending Accounts and, if so, have you maxed that out?  If you’re itemizing, have you considered increasing your charitable contributions?  If you’re unable to itemize this year, you might consider “bunching” your charitable contributions into an every-other-year schedule.

Many of us are facing financial challenges due to the pandemic.  Minimizing taxes is one good way of keeping money in your pocket.  We’re available to discuss your tax situation or any other financial matters in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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The Value of a Financial Advisor

By on September 1, 2020

We’ve talked before about the value of a financial planner, but the current pandemic has brought certain aspects of this value into sharper focus.  One could construct a laundry list of reasons a financial planner can be an important partner, but I really liked a recent Vanguard study that organized these benefits into three categories:  portfolio value, financial value and emotional value.

Portfolio Value.  Fee-Only financial planners can help you create additional wealth.  With the creation of an investment plan, an advisor can assist in growing your assets to meet your financial goals and to help insulate them from the ups and downs that we must expect.  They will also help you focus on net return – that is, taking fees, taxes and other costs into account to maximize what stays in your pocket.  In its study, Vanguard found that working with an advisor can add up to 3% in net returns, particularly for taxable investors.

Pandemic Perspective.  All three major indices were down 20-35% in March.  Ouch!  (They have been recovering since with NASDAQ leading the way.)  Your advisor should have diversified your investments before the pandemic in order to insulate you from these unprecedented conditions as much as possible.  Portfolio value also meant understanding and reacting to changes in income tax rules and as well as to the Required Minimum Distribution rules.

Financial Value.  Fee-Only financial planners can help protect your wealth.  They help you set goals and develop plans to meet those goals — such as saving for college, retirement and for any estate aspirations.  They aid in controlling expenses through spending plans and debt management.  And, they can help protect your wealth from catastrophes through things like life insurance, liability insurance and health insurance.

Pandemic Perspective.  For some of us, a job loss profoundly affected income. Hopefully you had a rainy-day fund to help you through tough times.  Even if you didn’t, this is a great reminder to start building one for next time. For the rest of us, income was probably affected in one way or another such as by decreased investment returns.  With reduced income, some of us faced increased debt levels.  It’s nice to have an advisor who’s familiar with the various debt-relief programs that are being offered.  Some companies and institutions have decreased or even suspended their retirement savings contributions.  For those who can, it’s been important to increase our personal contributions to stay on track for retirement.  If you or a family member did contract coronavirus, healthcare costs were a major concern and hopefully you were covered by a good insurance plan.

Emotional Value.  Fee-Only financial planners can help by reducing the anxiety of financial ups and downs that are simply part of life.  A fiduciary advisor (if he or she is a Certified Financial Planner TM)   should help reduce some of your financial worries as they are required to act in your financial best interests.

Pandemic Perspective.  The emotional value of having a financial advisor during these times is huge.  It’s so reassuring to have someone who has seen the ups and downs before and who can reassure you that things will recover.  It lets you focus on things like how to handle your kids’ schooling and how to go to work safely.  And, should your family be negatively affected by COVID 19, it is such a comfort to have an advisor who understands your financial situation and is there to help.

These are tough times and we’d like to help you in any way that we can.  We’re available to discuss your situation in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Financial Navigation During the Pandemic

By on August 1, 2020

The coronavirus pandemic continues and certainly will do so through at least the end of the year.  While this is an unprecedented period for almost all of us, there are some well-known things we can do to successfully navigate our way through it.  I’ve summarized a few of them below.

Watch Cash Flow.  This is not the time to dig yourself into a financial hole.  Cash flow has two parts:  income and expenses.  Naturally, the goal is to have income exceed expenses. 

Expenses.  If you currently track your expenses, congratulations!  If you don’t, why not use the enforced at-home time to start doing so?  Once you’ve collected a little expense history, you can pretty easily set up a rough budget.  With this information you can better control expenses.  For example, with your expense history, you’d probably see some items such as entertainment and travel drastically reduced.  On the other hand, you’d probably see an increase in grocery expenses due to delivery charges and/or increased internet spending.  Having a handle on things lets you adjust your lifestyle in near real time.

Expense Relief.  This deserves its own section because there is so much help available during this pandemic.  Banks are cutting consumers some slack on loans, same for credit card payments and student loans (payments can often be suspended through the end of September).  Just go to the appropriate website and see what’s available.

Income.  Sources of income will vary depending on your particular situation.  If you’re still working, your paycheck is normally the biggest component.  If you’re retired, social security, pensions, RMDs and investments provide most of your income sources.  If you’re unemployed, you might have unemployment insurance (including the $600 added-benefits check from the government) and hopefully you have a rainy-day fund to help get you through this.  And, of course, many of us received the $1,200 COVID-19 relief check through the CARES Act.

Scam Alert.  The scammers are super active right now trying to take advantage of the crisis.  It seems like I get several emails a week asking me to click here to reactivate my Amazon account or to verify my banking information.  You know the drill on this, but just increase your caution for now.  The FTC has actually provided some specific scam warnings:

  • Don’t respond to texts, emails or calls about checks from the government. Here’s what you need to know.
  • Ignore offers for vaccinations and home test kits. Scammers are selling products to treat or prevent COVID-19 without proof that they work.
  • Be wary of ads for test kits. Most test kits being advertised have not been approved by the FDA, and aren’t necessarily accurate.
  • Hang up on robocalls. Scammers are using illegal robocalls to pitch everything from low-priced health insurance to work-at-home schemes.
  • Watch for emails claiming to be from the CDC or WHO. Use sites like coronavirus.gov to get the latest information. And don’t click on links from sources you don’t know.
  • Do your homework when it comes to donations. Never donate in cash, by gift card, or by wiring money.

Donate.  Even though you need to watch out for scammers, this is a wonderful time to support your favorite charities if you’re in a position to do so.  More and more people need help during these difficult times.

Buy Locally.  This is a tough time for many companies – large and small.  If you can find your items locally, why not help keep our businesses afloat?  If you aren’t able to go out yet, ask the business if they offer delivery.

Invest in Yourself.  Maintaining your finances is certainly important, but don’t forget to also maintain yourself and your family.  A top priority in this area should be exercise.  You don’t need to go to the health club to stay fit.  If you have some home equipment, dust it off and start riding (or whatever).  Take a walk (wearing a mask and social distancing where appropriate).  Eat healthy food.  Being at home may provide the time to prepare your own meals – and they can be very tasty!  Attend to significant medical problems – maybe your doctor offers virtual appointments.  Limit your consumption of bad news.  Check what’s going on, but don’t live on your phone or laptop all day.  Maintain social contacts – remotely.  It might be dangerous to get together in person, but many of us have more free time to call (or FaceTime) family and friends.

If you’d like to further discuss managing your finances during the pandemic or have other financial questions, we’d be happy to discuss things in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Using Credit Cards Wisely

By on July 1, 2020

During the coronavirus stay-at-home and safer-at-home periods, many of us have been buying groceries and other necessities on the internet using our credit cards.  This has reminded me that it might be a good time to review some of the basics for the use of credit cards.

Fully Pay Card Debt Each Month.  It’s important to use your credit cards wisely.  The thing that I stress is that it’s best to pay off the balance in full each month.  Paying in full avoids interest payments which are notoriously high for credit cards.  Paying in full also helps to ensure you are spending less than you earn since carrying a balance on a credit card is a red flag for overspending.  If your card offers an automatic-payment feature, just select the pay-in-full option.  Carrying credit card debt is not only costly, but it can also adversely affect your credit score.  For example, one factor in calculating your credit score is the ratio of total debt to available credit.  If you are not able to pay the entire balance monthly due to short-term income issues, you should always make at least the minimum payment to avoid penalties and higher interest rates.

Keep an Eye on Charges.  Another best practice is to monitor your credit card statements looking for errors and fraudulent behavior.  Minimally, you should carefully review your monthly statement.  Better yet, review your statement online weekly or biweekly to look for problems.

Get the Right Card. You probably already have one or more credit cards.  However, it might be worthwhile to review whether it’s the best card for you.  These days, many companies offer some kind of a premium for having their card.  For example, some cards offer airline travel points or cash back or a discount at the issuing company.  It’s good to see which benefits best suit your needs and whether they’re worth the annual fee that is often charged.  If these premiums aren’t useful to you, it’s probably best to search for a no-annual-fee card.  Certainly the interest rate and the late-fee charges are important considerations too.

Don’t Cancel All of Your Cards.  You might think that it’s a good idea to cancel all your infrequently-used cards to simplify things.  That sounds good, but can actually damage your credit score.  The reason is that the denominator of the debt-to-credit ratio is the total of all of your credit card limits.  Closing a card reduces that denominator which increases the ratio.  I do want to emphasize that it’s important to not think you can improve your credit score by taking out a bunch of credit cards all at once to increase the ratio’s denominator.  This is because the credit agencies’ models frown on taking out cards too frequently so this will actually hurt your credit score.  Also, your length of credit history is important to your credit score.  So you should consider keeping your oldest card. 

Immediately Report Card Loss.  One final credit card tip that is hard to overemphasize is to promptly report the loss of a credit card.  This will allow the credit card company to freeze your account before someone tries to make fraudulent purchases and will also help protect you against having to pay fraudulent charges should any occur.

Naturally the optimal use of credit cards depends on your individual circumstances.  For example, you may be part of the large unemployment population right now.  In this case, you need a strategy which tides you over rather than one that might be textbook perfect.  Whatever you situation, we’d be happy to discuss it in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Using the Pandemic as a Catalyst for Financial Change

By on June 1, 2020

As I write this article, Colorado is transitioning from stay-at-home to safer-at-home rules.  We’ve had almost 24,000 coronavirus cases and over 1,300 coronavirus deaths, our unemployment rate is currently about 11.3% and our older citizens or those with health risks are still advised to stay at home.  So, while we’re trying to find the right balance between safety and an acceptable economy, life will continue to be very different — at least until sometime into 2021.

Lately, I’ve been thinking about how these difficult times can act as a catalyst for change.  Many of us have a new appreciation for our health.  We have an increased respect and appreciation for our healthcare providers, for our grocery workers, for our delivery infrastructure and for the millions of other people who are keeping us going.   We also have an increased awareness of the value of financial preparedness.

What are some of the key financial lessons that we might learn (or be reminded of) during these times?  One thing that comes to mind for me is perspective or maybe priorities.  It allows us to compare the importance of having the latest luxury item with having enough to eat and having the ability to pay the rent or the mortgage.  It reminds us of the importance of setting our goals and then pursuing them.  For example, I’ve written before about the importance of a rainy-day fund to help us get through unexpected financial challenges.  If you don’t have such an emergency fund, this is a reminder to start one for next time.  Since we’re spending so much time at home together, we’re afforded an opportunity to have frequent family discussions about our finances – what to spend our perhaps constrained money on right now.  The speed with which this pandemic overtook us reminds us to review our life insurance and get our estate in order sooner rather than later.  The stock market dive has reminded us of the importance of portfolio diversification.  What lessons we take away from this once-in-a-lifetime experience will vary, but each of us will benefit from some financial reflection before life gets back to its usual fast-paced speed.

I know that how we deal with this situation depends on whether we’re unemployed, still working or retired.  If you’d like to discuss the details of your situation, we are offering a no-charge, no-obligation initial meeting that can be arranged by calling us at 970.419.8212 or by visiting our website.  Meetings can be in person or conducted over the phone.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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2020 RMD Waived

By on May 1, 2020

As part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act), required minimum distributions (RMDs) from IRA, 401(k), 403(b) and other qualified retirement plans are waived for 2020.  If you don’t need the cash this year, this law will allow you to avoid withdrawing funds when the market is down substantially.

If you’ve already taken your 2020 RMD, the law allows you to roll it over into an IRA within 60 days of the RMD withdrawal.  One tax note on this, when you took your RMD, your brokerage firm withheld the associated state and Federal taxes.  If you roll over the RMD, you’ll be “repaying” the gross amount and the taxes can’t be reclaimed.  For example, suppose your RMD withdrawal was $70,000 and your combined state and Federal taxes were $14,000.  When you withdrew the $70,000, you actually received $56,000 and $14,000 was submitted to the government.  When you roll over the RMD, you’ll want to pay the full $70,000.  You can reduce your estimated tax payments by the $14,000 that was withheld or you can get the money back when you pay your 2020 taxes if a refund is due.

Some people are not subject to the 60-day repayment rule.  They include those who contracted coronavirus, have a spouse or dependent who contracted the virus or have experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

There are a few details associated with this RMD waiver that may apply to you such as the ability to move your RMD into a Roth IRA account.  If you’d like to discuss how the CARES Act affects you or review any other financial questions that you may have, please visit our website or give us a call at 970.419.8212 so that we can discuss your situation in a no-charge, no-obligation initial meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Coronavirus

By on April 1, 2020

We’re sure all of our readers are very familiar with the coronavirus pandemic that the world is experiencing.  You’ve been told to wash your hands, don’t touch your face, practice social distancing (or in some cases, isolation) and so forth.  As we write this article, Larimer County has 101 confirmed cases (61 of which are in Fort Collins) and 5 deaths (2 in Fort Collins).  Recently, both Larimer County and Colorado have issued stay-at-home orders.

Businesses have been asked to do their part in combating this pandemic.  The Colorado stay-at-home order requires many businesses to close.  Among the exceptions to this are “financial institutions including services related to financial markets.”  As a result, we are open, but are limiting our hours in the office.  We are available via phone and email during regular business hours.  The in-person office hours are by appointment and our normal hours are M-F from 9-5.

We’ve heard repeatedly from medical experts that our personal behavior is the single-most-important way to manage the coronavirus.  Often we have no idea whether we carry the disease or not.  If we do carry it and if we ignore the medical advice, we risk spreading the virus which may cause our hospitals to be overwhelmed, put our elderly and at-risk neighbors in jeopardy and endanger our health-care providers.

We are offering a no-charge, no-obligation initial meeting if you’re concerned about the stock market, your portfolio or any other financial matter.  Please visit our website or give us a call at 970.419.8212 so that we can discuss your situation.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Retirement Accounts & Taxes

By on March 1, 2020

You probably already know that there are several common ways to save for retirement.  These include 401(k) and IRA accounts.  What you might not be as familiar with, is how these various retirement vehicles are taxed.  There are four concepts in the taxation of retirement accounts.  First, some accounts allow you to invest money without paying any taxes on the invested principal (at least up front).  Second, some accounts allow the investment to grow without paying taxes on the growth (at least prior to withdrawals).  Third, some accounts offer tax-free distributions.  And finally, some investments offer none of these tax advantages – all funds are taxed.  Stock market investments are an example of this.  Let’s take a brief look at the first three situations.

Tax-Deductible Contributions.  Traditional retirement accounts such as 401(k) and traditional IRA accounts are good examples of this.  You lower your gross income by the amount invested.  The investment grows on a tax-deferred basis.  You pay ordinary income taxes when you withdraw.  There are rules that limit the size of your annual investments, penalties if you withdraw funds before age 65 and distribution requirements (RMDs) starting at age 72 (that’s a new age beginning in 2020).

Tax-Deferred Growth.  Tax-preferred retirement accounts offer tax-deferred growth.  This includes 401(k)s, traditional IRAs, Roth IRAs and non-qualified annuities.  In these accounts, your investments grow without having to pay any taxes (for most traditional investments).  For traditional IRAs, 401(k)s and non-qualified annuities, taxes are paid at ordinary income rates upon withdrawal.  For a Roth IRA, withdrawals are tax exempt and penalty exempt if you’re at least 59½ years old and you’ve had a Roth IRA for at least 5 years.

Tax-Free Distributions.  As noted in the previous section, retirement-account taxes are paid upon withdrawal with the single exception of Roth IRAs.  This can provide a very attractive source of tax-free retirement income.

How your retirement investments are taxed can guide where you invest your retirement dollars.  However, there are other important considerations too.  For example, many companies match your 401(k) contributions up to some limit.  Often, the match is 100%.  No tax break can match an immediate doubling of your investment.  Also, there are limits as to how much you can invest in most of these vehicles which cause people to use multiple approaches.  Additionally, some tax benefits are not available to taxpayers who have a significant income.  Traditional IRAs are an example of this.

In addition to the above considerations, there are other investments such as Health Savings Accounts (HSAs) and 529 college savings plans which offer tax advantages.  (Indeed, HSAs are the only plans that offer all three of the tax advantages described above:  tax-deductible contributions, tax-deferred growth and tax-free distributions.)  If you’d like some help mapping out the right retirement-account strategy for your situation or if you want to review any other financial questions that you may have, please visit our website or give us a call at 970.419.8212 so that we can discuss your situation in a no-charge, no-obligation initial meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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