How much money do I need to retire?  If you have contemplated this question, you may be forgetting one more hurdle to carefree retirement – taxes. You work hard to grow your nest egg for retirement and should not have to have those savings be diminished by excessive tax liability. Taking advantage of tax efficient investments will help you grow your wealth and reduce uncertainty so that when the time comes to retire you can do it with confidence. The goal is to balance between reducing your taxable income now and reducing your tax burden when you retire.

Here are just a few ideas to think on:

o   Maximize your retirement contributions as early as you can. If you are not covered by an employer plan consider making tax deductible contributions to self-employed plans or after-tax contributions to a Roth IRA.

o   Hold tax inefficient investments such as bonds and high turnover stock funds in tax-deferred retirement accounts while purchasing municipal bonds and index funds in taxable brokerage accounts. Keep in mind that interest earned on municipal bonds purchased for the State you live in are tax free for Federal and State income taxes!

o   For taxable brokerage accounts, focus on assets that have long term growth potential. Under the current tax law, investments that you hold for over a year before selling get favorable tax treatment.

o   Do not assume that you will be in a lower tax bracket for retirement. Future tax rates are unpredictable so it is important to plan on investing in both after-tax and pre-tax accounts.

The most important aspect of retirement planning is to take a proactive approach. Know what you are invested in and how it can affect your financial future. At least annually familiarize yourself with how your money is invested for retirement and how it is performing. If you would like any tax advice regarding planning for the relaxing retirement you dream of, or any other tax needs, we are here to help!


Wilmington, NC CPA