Protecting Your Retirement Savings from Tax: 12 Tips

One can't overstress the importance of protecting your retirement savings from tax. There's no time like right now to put a plan together to help keep your nest egg accumulating and minimize what you'll pay to the Internal Revenue Service when the time comes. Here are some tips to consider.

Tip #1 – Assume You are on Your Own

Your employer may resume contributions to your 401(k) plan, but you can’t count on it. For the foreseeable future, assume that your retirement savings are your own responsibility.

Tip #2 – Keep Saving

Now is definitely not the time to stop saving just to cut retirement savings tax. You’ll only sabotage your own future and/or any inheritance you plan to pass to your intended beneficiaries.

Tip #3 – Contribute the Maximum

In order to allow your money to potentially increase through investments, you need to make up the shortfall from your employer. This may mean that you have to kick in that extra 3 percent the employer no longer provides, or whatever the percent is. Consider contributing the maximum amount permitted by law. For 401(k) plans in 2009 that maximum is $16,500 per year, and $22,000 if you’re 50 or older.

Tip #4 – Open a Roth IRA

If your income is less than $105,000 (single) or $166,000 (married, filing jointly) in 2009, you can make a contribution to a Roth IRA of up to $5,000 (adding $1,000 to play catch-up if you’re over 50 by December 21, 2009).

Tip #5 – Consider a SEP if You Qualify

If you’re an independent contractor, or have an income-generating side business, you may qualify to open a SEP IRA.

Tip #6 – See if a Rollover IRA Makes Sense

You may have a 401(k) from a previous employer. Why not move that 401(k) into a Rollover IRA that you have control over? Many institutions offer fee-free IRA accounts. They also provide guidance, and offer a wide range of investment options and help choosing them.

Tip #7 – Learn How to Make Tax-Free Withdrawals

There are ways for you to make retirement savings tax minimized by making tax-free withdrawals from your Roth IRA. This will be without penalty before age 60. Check with your financial advisor or CPA.

Tip #8 – Understand Minimum Distributions

Retirement savings plans like 401(k)s have complicated rules. It’s important to understand minimum distribution rules so you can take advantage of them.

Tip #9 – Plan Your Estate

You want to maximize your retirement savings – tax that shouldn’t have to be paid, if you plan your estate properly. The key is to allow for growth of your assets for your beneficiaries. Make out a will, and possibly set up a trust. Designate beneficiaries and choose how the proceeds from your estate will be distributed. You may want to consider an inherited IRA.

Tip #10 – Actively Manage Your Retirement Savings: Tax and Principal

Don’t just let your funds languish in your 401(k), Roth IRA, Rollover IRA, etc. Research your available funds and check your asset allocations. Are you a moderate risk investor? That means an allocation of about 60 percent stocks and 40 percent bonds. If you have a longer retirement horizon, you may be comfortable with more risk, growth, or aggressive growth. Also watch out for high-fee funds. Instead, look for high-performing low-cost index funds. Keep costs, fees and expense ratios in mind.

Tip #11 – Consolidate Your Assets

Minimizing retirement savings tax can be a lot easier if you have all your accounts under one financial institution.

Tip #12 – Consider Working Longer

There’s no set retirement age anymore. People retire from one job only to start a new career or pick up a former hobby. More and more Americans are working well into their 80s and 90s, whether by choice or necessity. Consider working part-time, especially in your early retirement years. Also see if delaying Social Security payments may be beneficial to you.

 


 

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