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A Tax-Advantaged Retirement
AC: 18293-0713-6725 This presentation is the property of ICMA-RC and may not reproduced or redistributed in any manner.
2 Confidential and Proprietary
Tax Advice
ICMA-RC does not offer specific tax or legal advice.
Each individual’s tax situation is different. What makes
sense for one individual may not for another.
Consider consulting a qualified tax professional about
your tax situation as it may relate to information included
in this presentation.
3 Confidential and Proprietary
Tax Rules
Tax Planning Action Items
Plan for taxes – a potentially major expense
Understand the rules – look for ways to wisely
manage current and future tax bills
Seek help – consider working with a qualified
tax professional
* Except where noted, references to tax rules refer to IRS federal level.
State and local tax rules may differ.
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What Taxes?
2013 Tax Rates Married Taxpayers Filing Jointly Individual Taxpayers
Tax Rate of… …applies to each $ of taxable income that is between/over…
10% $0 – $17,850 $0 – $8,925
15% $17,851 – $72,500 $8,925 – $36,250
25% $72,501 – $146,400 $36,251 – $87,850
28% $146,401 – $223,050 $87,851 – $183,250
33% $223,051 – $398,350 $183,251 – $398,350
35% $398,351 – $450,000 $398,351 – $400,000
39.6% $450,001+ $400,001+
1. Your income is federally taxed at different rates
Taxable Income
– all your income
subject to tax,
minus deductions
and exemptions
In making financial decisions, consider consequences
of being bumped into higher tax brackets
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What Taxes?
2. Retirement account withdrawals…
Need $10,000, withdraw $10,000
If pay 25% Federal + 5% State income tax
= $3,000 in taxes!*
Must consider $14,285 withdrawal to receive
$10,000 after taxes
* For illustrative purposes only. Roth assets: n/a to distributions of contributions or, if qualified,
earnings. Withdrawals of after-tax or non-deductible contributions made to 401 plans and IRAs
are also not subject to tax.
IRS requires 20% withholding on 457/401 plan distributions
– but you may owe more (or less)
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What Taxes?
2. Retirement account withdrawals – penalty
taxes may apply pre-age 59½
• Exception for 457 plans* – but lose automatic
exemption if transfer to non-457 plan
• Age 55 exception – 401 plans
• Other exceptions possible – 401 plans,
IRAs…see IRS Instructions for Form 5329
* 10% penalty tax never applies to withdrawals of original 457 plan contributions and associated earnings. But penalty may apply to non-457 plan assets rolled into a 457 plan and subsequently withdrawn prior to age 59½.
Early withdrawals should be last resort –taxes and
increased risk of outliving assets
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What Taxes?
3. Non-retirement assets – interest, dividends
• Generally taxed at regular tax rates
• Stocks – qualified dividends currently taxed at
lower long-term capital gains rates
• Municipal Bonds – interest income not subject
to federal income tax but taxes may still apply
If subject to AMT
Federal capital gains taxes
State income taxes
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What Taxes?
3. Non-Retirement Assets – Capital Gains
• Tax on profits – all assets
• Sell individual asset or distributed by mutual fund
• Lower tax rate apply if held more than 1 year1
• Primary residence – profits may be tax-free2
Proceeds from Sale
– Basis (amount you already paid)
= Capital gain
1 Exception: certain assets such as collectibles and real estate subject to depreciation 2 Limits: $250,000 single filer owner; $500,000 married filing jointly owners. Must have
been primary residence for 2 of last 5 years. See IRS Publication 523.
Evaluate…tax bill vs. economic benefit of sale
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What Taxes?
Social Security Benefits Single Filer Married Joint
Up to 50% taxable $25,000-$34,000 $32,000-$44,000
Up to 85% taxable $34,000+ $44,000+
4. Your investments can trigger taxes
on Social Security
½ Social Security Benefits
+ Other income = $____
IRS Publication 554: Tax Guide for Seniors
When making decision that increases taxable income,
weigh the potential impact on Social Security benefits
10 Confidential and Proprietary
What Taxes?
5. And they can trigger higher Medicare
premiums
• Part B & D surcharges if just
$1 over income limit
$85,000+ (single) or $170,000+ (married)
• Based on 2 years prior tax return
For 2013 premiums, look at 2011 tax year
When making decision that increases taxable income,
weigh the potential impact on Medicare premiums
11 Confidential and Proprietary
What Taxes?
6. Required Minimum Distributions
• Yearly, taxable withdrawals upon age 70½
Initially, about 3.6% of account value
Rises yearly – 5.3% at age 80, 8.8% at age 90*
• 457/401 plans, Traditional IRAs. Exceptions:
Roth IRAs
If still working (current employer’s plans only)
• If fail to take, subject to 50% penalty
12 Confidential and Proprietary
Plan for Taxes
7. And your taxes may have increased in 2013
• Ordinary income taxes
• Payroll taxes
• Capital gains
• Qualified stock dividends
• Extra tax on wages and investment income
• Estate/gift taxes
Likely to impact higher-income individuals at a minimum
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A Tax-Free Retirement?
A tax-free retirement? No free lunch
• Be wary of strategies designed to avoid taxes
“..in the 1970s, investors were lured onto tax-shelter shoals…
A lot of them were bad deals that wound up costing more than
paying the taxes would have.”
―independent tax expert Robert Willens*
• Don’t make decisions based solely on taxes
* As cited in Wall Street Journal, “Getting Ready for Higher Taxes.”, Feb. 27, 2010
Which would you rather have… 25% tax on 6% return?
Or 0% tax on 0% return?
14 Confidential and Proprietary
A Tax-Advantaged Retirement
But you can be smart about taxes – evaluate…
Tax-advantaged retirement plans
Roth contributions, conversions
Withdrawal strategies
Where you live
How your non-retirement accounts are invested
Life insurance
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Tax-Advantaged Retirement Plans
Your Employer Plans, IRAs
Pre-tax, or tax-deductible, contributions
– lower current year tax bill
Tax-deferred earnings – avoid tax until withdraw
Roth contributions – no up-front tax benefit but
future withdrawals may be tax-free
Evaluate benefits of diversifying your taxes with pre-tax
and Roth contributions
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Tax-Advantaged Retirement Plans
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
457 Plan IRA
$17,500
$23,000
$35,000
+$1,000 if age 50 or over as of year-end
$6,500
$5,500
You may be able to contribute
accrued sick & vacation leave
+$17,500 during each of the three years prior to your normal retirement age*
* “Normal retirement age,” as defined in the plan and based on extent to which maximum contributions not made in previous years. If you elect this “pre-retirement” catch-up, you cannot also elect the age 50” catch-up.
+$5,500 if age 50 or over as of year-end
Contribution Limits – 2013
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Roth Conversions
• Receive tax-free distributions that don’t impact
Medicare premiums, Social Security benefits
• Not subject to RMDs
• Tax-free assets for heirs
Adding to Roth assets through Roth conversions –
pay taxes now for tax-free withdrawals later?
Traditional IRA
or
Employer Plans
Roth IRA Taxes owed*
* If subsequently withdraw Roth assets within a 5-year period and you are under the age of
59½, you are subject to a 10% penalty tax. Note: each conversion carries its own 5-year limit.
18 Confidential and Proprietary
Roth Conversions
Roth Conversion Strategies
Consider partial conversions of existing assets –
to avoid bump to a higher tax rate
Contribute to a Traditional IRA and then convert*
Avoid paying taxes out of the converted assets
Consider impact of the conversion tax bill on
Social Security benefits, Medicare premiums
* No taxes owed on non-deductible Traditional IRA assets converted. However, per IRS rules,
you cannot single them out. The tax-free percentage of the conversion is determined by dividing
any non-deductible contributions by the total balance of all non-Roth IRA assets owned.
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Withdrawal Strategies
Withdrawal order rule of thumb
Taxable accounts + any RMDs
Tax-deferred accounts
Roth accounts
Objective: maximize potential tax benefits
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Withdrawal Strategies
Withdraw sooner
Roth assets to avoid higher tax brackets
Tax-deferred assets in low tax-bracket years
Withdraw later
Taxable account assets with large gains
But consider these withdrawal order exceptions
May make sense to withdraw a mix of pre-tax,
Roth, taxable assets based on your specific situation
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Where You Live
Where you live in retirement…project state taxes
• Some states have no income tax…but may make
up the difference elsewhere
• Consider all taxes that may apply to you
• Also consider the overall cost of living
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If You Live and Stay in Colorado
• Income taxes apply but relatively low rate
• Sales taxes relatively low at state level…but
higher local taxes may apply, too
• Retirement income tax exemptions – Social
Security, pension benefits
• Property taxes – partial exemption for age 65+
who have owned/lived in home 10 years
• No estate/inheritance taxes
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Non-Retirement Accounts
Own non-retirement account assets?
Average stock fund shareholder, 2000-2009, owed taxes
equal to about heir returns
* Source: Lipper data cited in Wall Street Journal, “Tax Bomb Threatens Funds”, May 15, 2010.
2000-2009 – investors in average stock fund earned 1.99% pretax annualized return. Taxable
shareholders surrendered about half that return to taxes.
Source of non-retirement investments –
extra savings, inheritances, RMDs
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Non-Retirement Accounts
Investments that tend to generate larger tax bills –
hold in retirement accounts
Lower tax-bill investments
Higher tax-bill investments
Taxable Accounts
Retirement Accounts
25 Confidential and Proprietary
Non-Retirement Accounts
Examples of tax-efficient, mutual fund
investments
Stocks – broad-market index, tax-managed, and
other funds that tend not to trade a lot
Municipal bonds – tax-exempt bond funds
• Generally not suitable if in low tax bracket
26 Confidential and Proprietary
Non-Retirement Accounts
Be strategic – “harvest” tax losses
• Sell investments at a loss – offset capital gains,
ordinary income
• Caution – could end up paying more
when sell later
• Consider especially for assets you plan to gift
to charity or heirs
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Life Insurance
Life insurance has tax advantages but at a cost
• Tax benefits
Tax-deferred cash value can borrow against
Death benefit to heirs, tax-free, upon your death
• But…
Costs – often takes 20 or so years to realize any
gains because of commissions, fees early on
Loans reduce death benefit
If policy lapses/surrendered, loan amount
may be taxable
Evaluate carefully –
seek qualified, independent opinion
28 Confidential and Proprietary
Plan Sponsor Checklist
Help educate – taxes are a key expense to plan
for in retirement
Help diversify tax situation
Add Roth contribution and conversion provision for
sponsored retirement plans (n/a to 401(a))
Adopt Payroll Roth IRA
Help keep perspective – disciplined saving and
investing are critical
29 Confidential and Proprietary
Learn More
THANK YOU
• www.irs.gov
• Qualified tax professional