Tag: Tax and financial  Qualified planning for retirement, 401k and IRF, Optimize Money Savings, Investment accounts, Funds

Tax Planning To Optimize Your Savings For Retirement

August 3rd 2020

Tax Planning for Retirement Planning


How much savings can be good for retirement, of course the more the better, this is the opinion we want most people to have. To accumulate a huge retirement fund, the only way to achieve this goal is to start a retirement plan as soon as possible, exchange time for space, and accumulate all and we hope lot’s of free money for a long time. 

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Do you love to save and save money for the future? Saving money is a great virtue. Most people put the maximum amount in their 401K or individual retirement accounts (IRA) for tax saving and pension purposes. 


The biggest reason why people put the maximum amount in their retirement accounts is to pay less tax today. But in the long run, some taxes are saved today, and higher taxes will be paid when they retire. Assuming a 10% annual return, 30 years later their 401K can accumulate to about several million. Be sure and customize your financial plan to compute your exact retirement amount based on your lifestyle and budget. 

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Various options for Retirement Plans


There are two main types of retirement plans: Qualified Plans and Non-qualified Plans. The former is tax deductible, and the latter cannot be deducted.


▼Qualified Plans mainly include 401Ks or 403Bs, traditional IRA (Individual Retirement Account), SEP IRA, etc. Qualified plans can be tax deductible, but there are caps on tax deductible investments. You cannot put more money in than the limit, and you can't engage in discrimination, which the plan administration ensures.This means some limits are the same for qualified individuals.


▲Non-qualified plans are not tax deductible, but many non-qualified plans do not have an upper limit on how much money you can put (such annuities). The Non-qualified Plan also includes Roth IRA, annuity (Annuity) and life insurance that can be used as a retirement fund. Non qualified plans have the benefit of tax deferred growth and access tax-free oftentimes. Check with your specific plan administrator or financial advisor to understand your exact plan details and what benefits you most. Often clients do multiple strategies to complete various parts to their financial planning.


Both the Qualified Plan and the Non-qualified Plan have certain tax benefits. They can all be tax deferred, some are tax deductible, and some are not taxed when they are taken out (such as Roth IRA). Of course, you can also invest in mutual funds, stocks, or real estate as a retirement fund, but those practices may not enjoy tax benefits. 


There are also Qualified Plans such as Defined Benefit Plan, which can enjoy tax credits of up to 100,000 and 200,000. This kind of plan sounds attractive, but it is not suitable for most people. 

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Retirement Planning

Several commonly used retirement plans are discussed in detail below.



Most large and medium-sized companies provide employees with 401K plans. The 401K plan is a plan in which employees make their own contributions. Employees volunteer to invest up to 15% of their annual income and up to $19,500 (2020) into 401K.


The limits typically change year to year. The money invested in the 401K plan can be tax deductible, and the portion invested in 401K can be deducted with the year-end tax return. For working-class people, 401K is the most common type of retirement plan.


There is also the option of Roth 401K, that is, you put the after-tax money in the 401K plan, so that there is no benefit of the first tax deduction, but its income will never be taxed, and the company generally also provides a match. To sum up the difference between 401K and Roth 401K is that one is pre-tax and the other is after-tax; one is required to pay tax when it is taken out, and the other is not taxed when taken out. 


If you are at the beginning of your career and expect that your future salary and tax burden will exceed the present, and your investment will grow for many years, then it is recommended to choose Roth 401K; if your current income is very high, then the tax credit is more important to you, just utilize the 401K.


The retirement plan 403B provided by hospitals and schools has a different name, but it is like the 401K.

IRA and 401K

Traditional IRA

Some companies do not provide any retirement plans, $6,000 per year can be invested and once you are over age 50 you can invest $7,000. The money invested in a traditional IRA can be tax deductible or tax deferred like 401K. 

If one spouse works and the other does not work, the working spouse can also open a traditional IRA for the non-working spouse. 

If the AGI (adjusted gross incomes) of both spouses is less than $98,000, then $6,000 can also be tax deductible. If you spend $6,000 per year and hold it for 30 years, there will be about $800,000 after 30 years (assuming a (7-10) % return rate).


SEP plan

SEP plan is the Simplified Employee Pension plan, which is mainly intended for the self-employed, such as small company owners, or people who receive a Form 1099. Income can also be used to open a SEP. You can use 25% of your annual net income to open a SEP, up to a maximum of $60,000. Here’s a real-life example: if you are a medical practitioner or an independent consultant, with an annual income of $200,000, you can contribute to a SEP and remove related Expenses, Social Security Tax, Medicare Tax, etc., with net income of $150,000.


The SEP in this example could have a contribution of $30,000 (150,000 x 20%) to open an account. If you file a tax return of $120,000 (150,000-30,000), you do not need to file a tax return of the $30,000 invested in the SEP. If you can put $30,000 in the SEP every year, you can accumulate approximately $3.99 million in 30 years (if (7-10) % Annual return). The technicalities you just read will be worth it when you can consider retirement early and enjoy your retirement life this way. 

Roth IRA

Roth IRA is a retirement plan launched in the past ten years that benefits those who are starting out. It stipulates that individuals whose annual income (AGI) is less than $137,000 and those whose annual income (AGI) is less than $203,000 can open a Roth IRA retirement account. These are the numbers for 2020 in which you can invest $6,000 each year, and $7,000 if you are over age 50. Like the Roth 401K, any money invested in a Roth IRA is not tax deductible. This means the income generated during the investment process is not taxed when it is taken out for retirement. Roth strategies work best for those who have income that is increasing.


 As for which one to choose between traditional IRA and Roth IRA, you can refer to the comparison between 401K and Roth 401K above. If you have other Qualified retirement plans, whether to open a Roth IRA depends on the overall financial planning of the family, the balance between the retirement plan and the children’s education fund, and the current Cash Flow. Suffice to say if your income is increasing, the Roth is your best choice.


Annuity is also a kind of retirement plan, but most people do not know it well. Many are very interested. They hear it has guaranteed income and it’s true most do. However, the annuity is not tax deductible in the traditional sense but it has tax benefits. The taxes can be deferred until withdrawal. At withdrawal a special formula is used to ensure you are essentially taxed only on your “growth” part of your income stream.


Also, there is no upper limit on how much money can be put in the annuity. These three major benefits - the lifetime income that can often be guaranteed, the tax deferral, and the unlimited contributions of annuities make it interesting to explore There are two main types of annuities:

  • Fixed Annuity. The insurance company guarantees you typically at least 3% interest every year. It may also reach 5%, 6% or even 7%, but generally it will not reach 10%. 
  • Variable Annuity. Which is invested in mutual funds. This is a relatively new type of index annuity that can achieve exponential growth without losing money and lock the highest value when withdrawing money. 

The above-mentioned various retirement plans have their own advantages and disadvantages. Qualified plans can be tax deductible, but there are restrictions on how much you can contribute. Annuities are not tax deductible, but there is no limit on how much you can put in and you do not have to worry about double taxation either. 


In any qualified retirement plan, you must wait until age 59 and a half before you can take out your money (with a few exceptions). Life insurance is not a retirement plan, so there is no restriction that you must wait until the age of 59 and a half to take out money


Both traditional IRA, Roth IRA, and SEP must be opened before April for their contributions to count towards your tax filings. There is no time limit for annuities (unless it is inside your retirement plan). Remember: The earlier you take out life insurance, the better, because it is based on your age, health and avocations. Start now in whatever you do, the money can grow exponentially by the time you need it.

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Lea Wiviott Boracchia, Co-Founder, FinancialPlans.Info and InvestingProfits.Pro, both apart of the renowned Boracchia Wiviott Wealth Partners

We are a registered investment advisory focused on accessible wealth planning for everyone. Our mission is to help women, men and people of all ages, races, locations, and anyone plan and secure their most successful future. We were originally established in 2005 by way of 3 firms before my husband Marc and I registered our independent advisory in California.


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