Contributing as much as possible totax-deferred accounts is an appealingoption for many investors.However, the current tax climatemay prompt you to reconsider whetherall your retirement contributions shouldbe going into tax-deferred accounts, orwhether taxable accounts offer financialadvantages. There are many variableswhen it comes to investing for retirement,but 2 elements you can control arehow much you save and what type ofaccount you use.
When you decide where to put yourretirement savings, you're deciding whatkind of taxes you'll eventually pay. Contributionsand earnings in an employer-sponsoredretirement plan will be taxed atordinary income tax rates when you withdrawthem, regardless of where theycome from (eg, interest income, capitalgains, dividends, or a deferred salary).
On the other hand, because of the2003 tax law changes, the treatment ofearnings in taxable accounts will vary,depending on how they were earned. Formost investors, long-term capital gainsfrom stocks and bonds that are held formore than 1 year will now be taxed at15%. Qualified corporate dividends willalso be taxed at a maximum 15% rate.However, interest income and short-termcapital gains will continue to be taxed atordinary income tax rates.
Taxable vs Tax-deferred
By investing solely in a tax-deferredaccount, you will not be able to takeadvantage of the new lower tax rates oncapital gains and dividends. Whetheryou should take advantage of thesechanges depends on your personal circumstances.Consider the following factorswhen deciding how to divide yourretirement contributions between taxableand tax-deferred accounts:
Although the American tax landscapeis a bit confusing right now, understandinghow it applies to your unique situationcan make tax planning more efficient.
Scott J. Kleiman is the presidentof Apollonia Financial Services inElkins Park, Pa. All securitiesoffered through Linsco/PrivateLedger, member SIPC. Past performanceis no guarantee of futureresults. The information presented is the opinionof Scott J. Kleiman and not Linsco/Private Ledger.Mr. Kleiman welcomes questions or comments at800-242-1760 or firstname.lastname@example.org.