Retirement: Minimize taxes to maximize savings

Retirement: Minimize taxes to maximize savingsHow to minimize taxes and maximize your retirement portfolio.(Photo: Thinkstock)Retirement planning is hard enough for most Americans. But when you layer in a convoluted web of U.S. tax laws, the task can seem truly overwhelming.Some complexity is unavoidable. After all, how much you make, when you choose to retire and how much you’ll need in retirement can vary greatly from family to family.But the good news is that while there are no universal truths to retirement and tax planning, there are some common rules of thumb that the typical American should follow when trying to minimize taxes and maximize retirement savings.Here are a few pointers to ensure the tax man isn’t taking too much of a bite out of your investments, and to ensure you keep more of your money to reach your financial goals.• Max Out Your 401(k). In many cases, the most tax-efficient way for you to save for retirement is to max out an employer-sponsored 401(k) or 403(b) with pre-tax dollars taken out of your paycheck. By allocating pre-tax dollars from your wages to your retirement plan, you not only reduce the total amount you pay in income taxes, but also jump-start your portfolio by putting all of your savings to work immediately.Think of it this way: Investing $1,000 directly in a 401(k) each month grows your nest egg much faster than getting paid $1,000, paying 20% in taxes, and then investing the $800 that is left.The tradeoff is that 401(k)s are inflexible, and you have to pay steep penalties if you withdraw that cash before you’re age 59½. But if you’re playing the long game, then take full advantage of your 401(k). The maximum you can contribute in 2015 is $18,000 annually, with those 50 and older eligible to save another $6,000 in “catch-up” contributions.STORY: Tips for people who are behind in their retirement savings• Avoid booking short-term profits. If you are investing in a taxable investment account, it’s crucial to watch the holding period on your investments.That’s because an additional Medicare tax implemented in 2013 has pushed the top tax rate for investment income to 39.6% for top earners who sell investments less than one year after initially buying them. In other words, a $100,000 profit becomes just $60,400 after taxes.Compare that with a maximum rate of 20% for top earners if they hold your investments for a year and a day — in which case you would take home $80,000 after taxes.The numbers are stark here, so unless there’s an incredibly compelling reason to sell quickly and protect profits, you may ultimately come out with more cash if you wait to exit your investments.USA TODAYRetirement: Smart ways to save and spend• Always use first in, first out. What if you’ve bought into a given stock or fund at different prices across the years, with some profits but also some periods where you may have lost money in the same investment?Unfortunately, you can’t just pick the best possible price and timing when you sell. The default method used by the IRS is called “first in, first out” (FIFO), and like the phrase implies, you have to use the lots and cost basis of shares purchased first before you can use the later transactions.If that lot isn’t big enough to fulfill the entire sale, move to the next oldest transaction and average them together.In short, it’s a big no-no with the IRS to cherry-pick transactions to reduce your tax burden. If you do, this may actually open the door for an audit and steep penalties if you are caught.USA TODAYWar vet turned CFP: Take charge of your own money• Plan to pass on stocks, not cash. If you’re lucky enough to have investments that have appreciated a lot in value and plan to pass on your wealth, don’t cash out and don’t gift the shares before you die. That’s because tax rules allow heirs to treat the “purchase price” of their inherited stock as the price at the date of your death.If you simply sell before you die, you’ll have to pay taxes on years or even decades of profits, and if you gift the stock before death then you pass on your original cost basis and the potential tax burden.If your family doesn’t need the money immediately, it may be wise to consider passing on actual shares of stock after your death to reset the cost basis and reduce capital gains taxes as a result.Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks.USA TODAY’s Nanci Hellmich talks about how to save aggressively for retirement in your 20s, 30s, 40s and beyond. (Your Best Life in Retirement, MONEY)Don't let the government keep the Social Security benefits you rightfully deserve, said Laurence Kotlikoff, co-author of 'Get What's Yours.' NewslookUSA TODAY’s retirement columnist Rodney Brooks talks to Jeanne Thompson, a vice president at Fidelity about saving aggressively for retirement. (MONEY, USA TODAY)USA TODAY’s retirement columnist Rodney Brooks talks to Jeanne Thompson, a vice president at Fidelity Investments about what it takes to save a million dollars for retirement. (MONEY, USA TODAY)Target date fund managers are continually working to improve returns even as their fundholders 'set it and forget it,' said Fredrik Axsater, Global Head of Retirement Programs for State Street Global Advisors. NewslookPresident Barack Obama calls for tighter rules on retirement account brokers, reigniting a confrontation with the financial services industry over rules affecting trillions of dollars in 401k and other savings accounts.. (Feb. 23) APUSA TODAY’s Nanci Hellmich shares best tips for landing a job in your retirement years. (MONEY, USA TODAY)USA TODAY’s Nanci Hellmich outlines a plan for pumping up your physical activity in the new year. (MONEY, USA TODAY)Retirement planning is a challenge regardless of your pre-retirement income. Over half of American households may not be able to maintain their standard of living in retirement, according to the Center for Retirement Research. NewslookIf anyone should know how to get the best income from your funds, it’s Gary Davis, head of Vanguard’s $900 billion in bond funds. And that’s why we talked to him. (MONEY, USA TODAY)Katherine Dean, Senior VP/Managing Director of Wells Fargo shares tips on retirement planning. If you're starting to think about your New Year's resolutions, investing efficiently in your financial future is always a good one to consider. It's never a waste of your time to understand where your money is going and how you can save for your ret NewslookUSA TODAY’s Nanci Hellmich talks about how much exercise it takes to burn off some holiday indulgences. (Your Best Life in Retirement, MONEY)USA TODAY’s Nanci Hellmich talks about how to avoid the pitfalls of impulse purchases. (Your Best Life in Retirement, MONEY)USA TODAY’s Nanci Hellmich outlines stress-reduction strategies for the holidays (USA MONEY, USA TODAY)USA TODAY’s Nanci Hellmich shares ideas for creative inexpensive holiday gifts. (USA MONEY, USA TODAY)Same-sex couples in general are likely to have saved far less for retirement than their straight counterparts, according to exclusive analysis of the Federal Reserve's Survey of Consumer Finances by AP. (Nov. 21) APUSA TODAY’s Nanci Hellmich offers easy ways to curb your spending during the holidays. (Your Best Life in Retirement, MONEY)USA TODAY's Nanci Hellmich offers ideas for cutting costs when dining out. (USA MONEY, USA TODAY)USA TODAY's Nanci Hellmich shares advice from financial experts who say many Americans need to save much more aggressively for retirement. USA TODAY's Nanci Hellmich explains how to cope with retiring from your job. (Money, Retirement, USA TODAY)USA TODAY’s Nanci Hellmich shares tips for decluttering in retirement. (Retirement, USA TODAY)Pets ease transition into retirement USA Today's John Waggoner explains how a Social Security raise will impact retirees in 2015. USA TODAY contributor Regina Lewis explains why a 20 minute financial planning session benefits you. (Money Quick Tips, USA TODAY)Millennials may be struggling with student loans and a rough job market, but nearly half have already started saving for retirement, said Kristen Robinson, Senior Vice President at Fidelity. NewslookThe new CEO Of AARP CEO Jo Ann Jenkins who takes over on September 1, 2014 replacing outgoing CEO A. Barry Rand. Nearly half of Americans surveyed by the Wells Fargo/Gallup Investor and Retirement Optimism Index said they are worried about outliving their savings. NewslookAmreicas Markets with John Waggoner on the Social Security cost of living raise. USA TODAYAmericans are feeling guilty about not investing enough over the past year, said Aron Levine, head of Preferred Banking and Merrill Edge at Bank of America. NewslookConsumers should own an annuity for what it will do, not what it might do, says Stan Haithcock, annuity expert and author of "The Annuity Stanifesto". NewslookPeople need to plan to provide income for themselves in retirement with the same care and diligence in which they save for retirement, says Scott Holsopple, Managing Director of Retirement Solutions at The Mutual Fund Store. NewslookRetirees and investors close to retirement should not make dramatic changes in their accounts due to the recent market volatility, said Scott Thoma, Retirement Strategist for Edward Jones. 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