Almost every American adult contributes to at least one retirement account that allows them a current income tax deduction or a tax-deferred account contribution (IRA's, 401k's, 403b's, 457b's and defined benefit plans). And as you know, when you start to take distributions from these accounts, you pay income taxes at ordinary income tax rates. Other retirement accounts, like Roth IRAs, don't allow a current deduction, but they’re tax free when you are ready to begin taking distributions at age 59½. A good-size Roth is a wise estate planning move. Since the IRS does not make you take withdrawals from your Roth over your lifetime, you can leave a tax-free "gift" to your heirs if you don’t spend it all during your lifetime.
As Physician’s Money Digest says in “10 Reasons You Need a Taxable Investment Account,” taxable retirement accounts are ignored because we’re so focused on IRS-approved retirement accounts. But you might think about supplementing your savings with a taxable retirement account. This can be a regular, old-school investment portfolio that’s not linked to any government regulations and that you’re building for retirement.
Here are some of the benefits of a taxable retirement account:
- You have complete freedom over investments;
- You’ve got total flexibility over your account;
- You can use your portfolio as collateral for a loan;
- You don't have to start withdrawing your taxable account when you turn 70 1/2;
- You have "basis" in your account, which means when you withdraw money, you pay taxes only on the growth;
- You only pay a maximum tax rate of 20% on long-term capital gains and qualified dividends (from stock held for at least one year);
- You can write off capital losses in the account;
- You can use income from the account to offset an unused investment interest deduction;
- Your heirs will enjoy a stepped-up basis if they inherit the account from you; and
- Your heirs don't have to start taking withdrawals from the account when they inherit it from you.
But be aware that taxable accounts aren’t protected in the event of a lawsuit, and you get basis instead of a tax deduction. That should be examined in light of your goals and insurance protection.
This doesn’t mean having a taxable account is your #1 priority when saving for retirement, but it should be up on the list based on your finances and the integration of tax planning with your short- and long-term financial goals. It can be a good filler for some of the gaps in your tax and retirement planning strategy.
Do you live in South Florida? Proactive retirement planning, whether you have an employer-based account or not, is only a phone call away! Call me (305-443-3104) right away for peace of mind. I can help!
- I'm an exceptionally experienced Florida Bar Board Certified Estate Planning Attorney,
- I'm a Florida Bar Board Certified Elder Law Attorney, focusing on ALL legal issues related to aging,
- have prepared over 4,000 estate plans in 30+ years in practice,
- have administered over 600 estates through Probate, and
- am a Certified Financial Planner Professional™, plus
- I am also a Florida Certified Public Accountant (CPA).
Of course, if you would like more information about General Estate Planning in South Florida, I have a very informative website you are welcome to visit for more information.
Reference: Physician’s Money Digest (September 28, 2016) “10 Reasons You Need a Taxable Investment Account”