Printed in the Wednesday March,3 2006 edition of the Capital Times Around Town - Oregon

HOW SAFE IS YOUR RETIREMENT ACCOUNT?


A typical response that I get to this question is “My funds / investments are doing OK”. Unfortunately, that does not mean that they are safe. We all expect some level of fluctuation if we are invested in the markets and know that we need to have our investments diversified properly based on our personal timeline and level of acceptable risk. Even if your retirement account continually grows there is another type of risk that most of us do not even think about. That risk is taxation. One of the problems with 401Ks and other qualified plans is that the IRS is in control of your money. They tell you that at a certain time you must withdraw a specific amount of money whether you need it or not and they dictate how much tax you will pay on the distribution. Furthermore, if you fail to withdraw the required amount you are assessed with an excise tax of half the amount that you should have withdrawn! Even if you do everything within the IRS guidelines you may still reduce your 401K balance much faster than you might imagine because you have to pay tax on the amount that you withdraw to pay taxes with.

The supposed logic behind utilizing a tax deferred investment vehicle like a 401k, traditional IRA, or other tax qualified plan is that we are told that we will be in a lower tax bracket when we retire so that we will ultimately pay less in taxes than if we paid the tax now. Sadly, our deductions disappear at a time when we need them most. In fact, most retirees utilize the standard deduction and personal exemption due to a lack of itemizeable deductions. The bottom line is that we may never be in a lower effective tax bracket than we are right now. This does not mean we should not take advantage of an employer sponsored retirement plan. If your employer offers to match your contribution why would you turn down free money? Even after taxation something is better than nothing. The point is that we focus on saving for retirement but don’t even consider a distribution plan. A comprehensive retirement plan needs to include tax deferred and tax free savings vehicles in order to maximize your spendable retirement income.

If you haven’t already done so, now is the best time to find out if you qualify to use a Roth IRA or appropriate permanent insurance contract to protect your retirement plan from excessive taxation.

By David L. Mastos of DLM Financial Solutions
Financial Advisor