Rebuilding Toward Retirement

There’s no doubt that this economic downturn took a big bite out of many retirement saving nest eggs and rearranged the plans of millions of Americans of when they can retire, how they can retire, and even where they may retire. Over the coming weeks, we are going to touch briefly on some aspects of trying to rebuild your retirement nest egg in the most effective and efficient way. We won’t pretend to be stock market prognosticators or decide on the economic fate of the US economy, but we will try to educate you on your options and equip you with the right information to make informed decisions with your Financial advisement team, your CPA and Financial planners. Investing is hard enough without having all the information, so it is our goal to provide you with the tax laws and ramifications behind many of the retirement savings vehicles and techniques employed by your Financial planners and advisors.

We’ll start with some of the basics. Majority of retirement savings strategies call for individuals to hold their retirement assets and savings in tax-deferred or tax-free accounts as well as taxable accounts. There a few reasons for this. First, investing retirement funds in tax-deferred or tax-free accounts offers you the ability to grow your funds outside of the reach of the IRS until the funds are distributed to the owner of the account. However, these tax-deferred or tax-free accounts do have some shortcomings and additional taxable accounts are needed to maximize your savings and have a balanced approach to retirement. One such shortfall is that these accounts have an annual contribution limit depending on the type of account that will obstruct you from saving as much as you may need to in order to adequately provide for your retirement. Additionally, tax-favored accounts, generally, impose a penalty for “early withdrawals” from these accounts. These are two quick examples of why taxable accounts are needed in addition to tax-favored accounts in your retirement planning. Let’s take a brief look at taxable accounts and how they can factor into your overall tax picture.

Taxable Account Planning

I think we all might agree that losing money in the stock market is not the optimal choice; however, if it comes to pass, there are some positive tax ramifications for the taxpayer. This is pretty basic planning, but let’s review a few basics listed below and then briefly touch on a few examples.

• Unlike business losses, personal capital losses can only be carried forward. (Only
exception is in the case of a natural disaster. Contact your CPA if you feel you fall into
this category).
• If selling stocks, remember that your Losses can be used to offset your Gains. Short
term losses can be used valuably if timed correctly to offset any short term gains that
would otherwise be taxed ad your individual income tax bracket rather than the
preferred long term capital gain rate of 15%.
• If you sell stock and realize a net loss, it can be used to offset your wage income up to
$3,000 and the remainder is carried forward to the next year.
• Be careful with qualified dividends. They are taxed at the long-term capital gains rate;
however, capital losses (short and long) con only off-set them up to the $3,000 limit.

Example 1:

During 2009, James earned $60,000 from his job as a mechanic. He also sold a mutual fund he owned that resulted in a long term loss of $8,000. Additionally he sold stocks that resulted in a long term gain of $15,000, short term gain of $2,000 and $14,000 in short term losses. As a result of his sales in 2009, James realized a net $5,000 short term capital loss calculated as follows:
--$4,000 - $2,000 = $12,000 short term loss
--$15,000 - $8,000 = $7,000 long term gain
--$12,000 - $7,000 = $5,000 short term loss

Of this $5,000 short term loss, $3,000 may be used to offset his current income of $60,000 and $2,000 may be carried forward as a net short term capital loss into 2010.

Example 2:

During 2009, Samantha has qualified dividend income of $8,000 and a net long term capital loss of $10,000. The net long term capital loss can only offset $3,000 of the qualified dividend income; therefore, the remaining $5,000 of dividend income is taxed at a maximum rate of 15%. The balance of the long term capital losses, $7,000, is carried forward to 2010.

We’ll be back week to talk more about retirement and how taxability and tax deferral play a role in your decision making. On deck is annuities. Have a great week and as always, if you have any tax or accounting questions, we at McArthur & Co. would be glad to become your trusted tax advisor.

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