Challenging Taxes

What, you may ask, do property taxes have to do with a retirement plan? Other than exerting a negative force on the available cash in your plan, once you do decide to begin distributions, they also have a positive influence on the quality of the community you live in. So if your taxes are excessively high, should you try to get them lower? If so, define excessive.

Are you paying too much?
In many parts of the country, homes are worth less than they were two years ago. But what often does not follow those changes in valuations are the taxes assessed. For those lucky enough to still have a job, have maintained their salaries and have seen a minimal decline in the value of their house, challenging the property taxes you are currently paying might be counterintuitive and not worth the effort. While a reassessment of your home does not take into consideration your ability to pay, it might be worth considering if the information the assessor has on your home is not correct.

More on the effect of property taxes on your retirement plan can be found here.

Roth IRA and Taxes

Putnam recently surveyed clients about this and found that investors who could pay the taxes on their tax-deferred accounts now, at their current tax rate, are not flocking to this retirement product the way they assumed they would.  The Putnam Investments LLC survey was focused on the higher tax bracket IRA owners who could take advantage of the window of opportunity that would allow them to spread their tax liability over 2011 and 2012 making their future tax obligation disappear.

According to Christine Fahlund, senior financial planner for Baltimore-based T. Rowe Price Group Inc. the fear of the government lifting the tax-free status of these plans would leave the higher income earners – the IRS lifted the income restrictions which had previously been at $100,000 – in jeopardy.  She said in a recent Bloomberg article: “If that happened, you would have accelerated your tax payments unnecessarily.”

More here on Roth IRAs and Taxes

How Much Control over Your Retirement Plan Do You Have?

Today we are going to tackle the self-directed IRA. We all know what an Individual Retirement Account or IRA is. Briefly, it is the retirement tool for those of us who may not have access to a 401(k) that defers taxes for retirement. The deferring part is not really as complicated as it seems. In a 401(k), you have your contribution taken out before you pay taxes; in an IRA, you pay with after-tax money and then take the deduction when you file, basically subtracting the taxes from your contribution to be paid later.

How is a regular IRA different than a self-directed IRA?
The differences are not as obvious as the title of these products sounds. An IRA is an investment chosen by you and you direct the funds to it for your retirement. It seems like this should be called self-directed but in reality, it is very different from what the IRS views as a self-directed IRA.

In a self-directed IRA, you become the manager of the whole process. Rather than simply sending money to a mutual, fund company, the most common sponsors of IRAs, you direct the underlying investments. In the previous example, the institution is the middleman. In a self-directed IRA, the institution, whomever or whatever one you chose, does what you tell them to do.

Learn more about self-directed IRAs.

Catch our daily column: Repercussions, a Retirement Review

The Future of Your 401(k) Withdrawals

I am asked quite frequently how much you should have in your 401(k) when you retire.  The real question is how much will I need to have to withdraw a certain amount of income from the plan when they retire. 

These seem like the same question, at least on the surface.  Determining your eventual distribution from your plan depends on how much is in your plan.

The problem lies in an unknown future filled with financial events that are largely beyond your control.  We can’t predict inflation.  It could be mild as it is currently or it could skyrocket.  We can’t predict taxes. 

They could remain stable and if the popular theory of being taxed less in retirement holds any validity, we can make educated guesses as to what that rate will be – but not much more.  We can’t predict the markets.  We tend to be an optimistic sort projecting past historic returns as a measure of future results.

So if inflation doesn’t cooperate and taxes could rise and the markets continue to be volatile, where does that leave us?  And with what controls?

Read more here.

Paul Petillo is the managing editor of Target2025.com and BlueCollarDollar.com