Tax Planning

Taxes are probably the greatest threat to your financial success during retirement. It’s not what you make and save that is important, it’s what you keep.

There are three main “buckets” of taxation – Tax-Now, Tax-Later and Tax-Advantaged.


In the Tax-Now bucket, your contributions are from After-Tax dollars, meaning that you have already paid income taxes on the principal. Earnings from these accounts are taxed each year that earnings are realized. You must report and pay taxes each year. Bank accounts

will usually issue a 1099-INT statement each year. CDs will issue a
1099-INT in the year that the term ends. You will receive a 1099-B in
the year that you sell a stock and realize a gain. When a mutual fund
distributes dividends, you will receive a 1099-DIV and it will be taxed
as ordinary income even if you do not sell the mutual fund. When you sell the mutual fund and realize a gain, you will also receive a 1099-DIV from the IRS.

A Realized Gain is when an asset, such as a stock, bond, or real estate is sold at a price higher than the original purchase price. If a realized gain from an asset that was held one year or less, it will be taxed as ordinary income. If the asset was held for more than one year, it will be taxed as a long-term Capital Gain, which is generally at a lower tax bracket than ordinary income tax.

Keep in mind that if any of these accounts, including a mutual fund, are held in a Qualified Plan, such as an IRA or 401k, you will not receive any 1099 forms. These accounts fall under the Tax-Later bucket.


In the Tax-Later bucket, your contributions are generally paid in Pre-
dollars, meaning that you have not yet paid income taxes on the
principal. For employer retirement plans, such as a 401k or a 403b, contributions are automatically deducted from your paycheck and are
not counted towards your taxable income on your W2 for that year.

With IRAs and other individual retirement accounts such as a SIMPLE
IRA and Keough, deductions are made when you file your income taxes each year.

401k plans, IRAs and 403b plans are known as Qualified Plans, which are Pre-Tax dollars and tax-deductible in the year of contribution.

If you take your money out of these plans prior to age 59 1⁄2, the IRS will levy an early withdrawal penalty of 10%, and you will need to pay income taxes on the distribution at your current income tax rate.

While Tax-Later may seem like a great plan, there are several caveats that must be mentioned:

The IRS mandates that you must begin taking distributions from your Qualified Plan no later than age 70 1⁄2. These are called Required Minimum Distributions (RMDs). Your RMD amount is determined by applying a life expectancy factor set by the IRS to your account balance at the end of the previous year. If you don’t take the RMD, the IRS will levy a 50% Excise Tax on the amount that you should have taken.

Distributions from Qualified Plans may also cause your Social Security to be taxed! This little-known fact can severely impact your expected retirement income. We will cover this topic in greater detail later.

If you place money directly into an annuity that is not under a Qualified Plan vehicle like a 403b, the contributions are after-tax and not tax-deductible. However, they are still in the Tax-Later bucket but are considered Non-Qualified. These Non-Qualified Annuities are still subject to the 10% penalty for distributions prior to age 59 1⁄2.

Unlike stocks, bonds, real estate and other assets, distributions from these Tax-Later vehicles will be taxed as Ordinary Income at the time of distribution, even if held for more than one year – meaning that these vehicles are not Tax-Advantaged.


Tax-Advantaged accounts don’t have many of the caveats that you will find in the Tax-Later bucket. These accounts are made with After-

Earnings in these accounts are not subject to income tax in the year of gain nor during retirement distribution. With Tax- Advantaged accounts, you are paying the income tax to the IRS on the funds used for the initial contribution, however upon distribution, there is no tax due on any of the funds received!

Roth IRA 529 Plans Life Insurance

Distributions prior to age 59 1⁄2 are not subject to the IRS 10% penalty
and are not subject to Required Minimum Distributions since income tax was already paid on the contributions.

Lastly, distributions from Tax-Advantaged accounts will not cause your Social Security proceeds to be taxed! Using Tax-Advantaged accounts can possibly help you have a tax- free retirement!

So what vehicles are Tax-Advantaged? Some common ones are Roth IRAs, Section 529 College Plans, and Life Insurance.