FINANCE
20 13 Chris Bridges is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley Smith Barney in The Villages, FL. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.
RETIREMENT PROTECT YOUR RETIREMENT FROM HIGHER TAXES WRITER: CHRIS BRIDGES
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ith higher taxes in 2013 and beyond a virtual certainty, now is a good time to examine whether you are doing everything in your power to make your investments as tax efficient as possible. Luckily, this year there are some increases to the contribution limits for tax deferred and tax-free accounts that should help ease the blow and ultimately increase your net return. First, the phase out income limitation for determining whether you can make a Roth IRA contribution increased to $178,000 for married couples filing jointly. That means that you and your spouse could each contribute the new maximum amount of $5,500 after taxes to a Roth IRA this year. While you wouldn’t get a federal income tax deduction for that $11,000 like you possibly would if it were a traditional IRA, the fact that you can withdraw that money down the road in retirement with no taxes on the earnings or contributions is very appealing. I think this added certainty on taxation normally makes it the better choice for most people. For traditional IRAs, the rules on deductible contributions are a bit more complicated because their status depends not only on income, but whether you are an active participant in your company’s qualified plan.
Regardless of whether the contribution is deductible or not, though, you still benefit from the increase in contribution size to $5,500 and your money will grow tax deferred until you begin accessing it in retirement. Another option still on the table in 2013 is Roth conversions. If you are fortunate enough to find yourself above the Roth IRA contribution limits and contributing to a qualified plan, your only option is to contribute to a nondeductible traditional IRA. The conversion part comes in where you can convert that nondeductible IRA directly into a Roth, thus eliminating taxes down the road on the earnings. There are some somewhat complicated rules associated with this process though, so consultation with your adviser is highly recommended. In addition to IRAs getting a step up this year, so do qualified plans like 401(k)s and 403(b)s. You can now contribute up to $17,500 per year. Another set of great features that many employers are adopting in their plans are Roth provisions. The great thing about a Roth 401(k) is that there are no income limitations for contributing to them so regardless of how much money you make, you can benefit from the same tax-free distributions that make it so attractive in IRA accounts. Everyone’s situation is unique, so how to best implement a tax efficient
strategy will vary. Because of the everchanging nature of tax laws, it is always prudent to discuss the options with your CPA to get a professional opinion. The important theme to keep in mind though is to defer taxes for as long as possible so that the power of compounding has time to make a real difference. In the long run, you will find that doing so may afford you a significantly better lifestyle in retirement.
CHRISTOPHER BRIDGES is a United States Air Force Academy graduate with an MBA from the University of Florida. As a financial adviser with Morgan Stanley, Chris focuses on comprehensive wealth management and investment strategies to help clients preserve, protect, and pass on their wealth. 352.751.7847 Morgan Stanley Smith Barney LLC, member SIPC.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein. SOURCE: www.IRS.gov
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