February 14, 2020
This article is contributed by LegacyShare. We are the leading service helping you share your legacy with the ones you love and trust so you can confidently know your legacy will transition smoothly. Please visit our website at legacyshares.com to review our services and to set up your legacy transition today.
Taxes & tax advantaged vehicles
Taxes can impact your investments and take a big bite out of your returns so it’s advantageous to consider tax advantaged vehicles when saving. Of course, investment decisions shouldn’t solely be based on tax ramifications. Other factors to consider is the potential risk, expected rate of return, and the quality of the investment.
Tax deferral can be beneficial because:
- Money spent on taxes remains in your investment which can add to growth potential.
- You may be in lower tax bracket in the future (i.e. retirement) when you withdraw.
- You can accumulate more assets due to the compounding effects. This can be very beneficial as the years go by to boost your return.
Tax advantaged vehicles for retirement
- Traditional IRAs – Anyone under the age of 72 who earns an income or is married to someone earning an income can contribute to an IRA. Depending on your income and if you are covered by a workplace retirement plan the contributions may be tax deductible. Either way, your contributions will grow tax deferred. Taxes will be due when a withdrawal is made, and a 10% penalty is avoided when withdrawals are made after age 59.5.
- Roth IRAs – They are available to individuals that are below a certain income threshold. Contributions are made on an after-tax basis, will grow tax deferred, and qualified distributions are available on a tax free basis. Like an IRA the maximum contribution per individual is $6,000 or $7,000 ($1,000 catch-up provision) if you are over the age of 50.
- Employer sponsored plans (401(k)s, 403(b)s, 457s)-contributions to these vehicles are pre-tax and grow tax deferred. Like the Traditional IRA, you will owe taxes when you make a withdrawal. You can contribute up to $19,500 for 2020 and if you are over the age of 50 you can make an additional $6,500 contribution. Some employers allow an after-tax contribution into a Roth 401(k), if so, when you withdraw it will be tax free. Lastly, employer sponsored plans will typically allow for the opportunity to receive a match from your employer.
- Annuities – This vehicle allows you to invest assets that may typically be subject to tax ramifications during growth (non-qualified accounts) into an insurance issued contract which allows various investment options (fixed to variable). The assets grow tax deferred like the above vehicles, there is no pre-tax deduction available since the annuity is funded with after tax dollars. When you withdraw (most annuities have a surrender period; be mindful of this expense), taxes are owed on the growth portion. Like all the above vehicles, you must be over the age of 59.5 in order to avoid a 10% penalty. Annuities have no limit as to how much you can invest.
It is important to begin saving for retirement sooner rather than later given the longevity you may face and the need to address expenses during your retirement years. If you are going to do so, maximizing a tax savings strategy will only help you accumulate more assets for you and your loved ones. LegacyShare is a perfect place to store investment statements or to notify your “keyholder” as to where documents can be found and who may be the beneficiary of your hard-earned assets.
Legacies are meant to be shared.
-LegacyShare
