Building retirement assets and managing income taxes

Doug Horn

The 2010 tax filing season is just under way and millions of Americans are gathering their documentation and preparing for the task of completing their annual income tax return. There are two ways of treating the tax return. First, it can be a historical record of what happened in 2010. Key the data, tie it in, review the results and then e-file the return. Not too much trouble and the annual requirement is complete.

Or, the return can be a planning tool in addition to recording the 2010 historical data. Once the 2010 data is in the return, it is time to review the options. Does it make sense to contribute to a 2010 individual retirement account (IRA)? Are the deductions complete. There are many deductions on the return that are not supported by outside confirmations such as form 1099, or 1098. These include non-reimbursed business expenses, miscellaneous deductions, and charitable contributions.

Charitable contributions made with cash are not deductible unless documented with bank records or by the recipient with an acknowledgement letter. Thus, it may be worth the time to write checks for all charitable contributions including the annual gifts to the Salvation Army kettle program or similar type programs. Four hundred dollars in cash gifts could reduce the income tax bill by one hundred dollars if given in the form of a check rather than cash and the taxpayer is in the twenty-five percent tax bracket.

If the return is showing a refund and it would be beneficial to add that amount to an IRA, but cash is currently not available, there is still a way to make the contribution. Instead of obtaining some type of tax refund loan, it is possible to file the return as though the IRA contribution has been made. This added deduction will also increase the refund. By e-filing the return and providing direct deposit information, it is very likely the refund will be received prior to the contribution deadline of the IRA, which is April 15th. As long as the 2010 IRA contribution is made prior to the deadline, filing the return first so the funds will be available for the contribution is okay and no rules have been broken. But the contribution must be made or an amended return will be required.

During retirement, everyone expects their income to be less and their income taxes lower. While this may be the expectation, it is not always the result. Due to personal investments, social security, and other retirement income, it is possible income taxes may still be significant during retirement. While social security income is generally not taxed, up to eighty-five percent of the benefit may become taxable income when other sources of income are high. While this may not seem fair, it is the rule. If the only sources of retirement income is social security, pensions, and traditional IRA accounts, then very little can be done to manage income taxes during retirement.

With social security income and pensions, these are monthly checks which are received regardless of need and cannot be turned on and off with need. Thus the annual tax impact is not within the recipient’s control. While there is control of when distributions are taken from IRA accounts, at least prior to age 70 ½ and required minimum distribution rules kick in, there is no control of the tax impact if the only option are traditional plans. By contributing to Roth IRA plans (or a Roth 401-k plan if the option is available) as well as traditional IRAs and taxable investment accounts, options are created for future sources of income during retirement. Having some funds in a traditional IRA, a Roth IRA, and a taxable account allows the owner to better manage their taxes during retirement. Withdraws can be taken from each or just one with the tax impact being considered and managed for the best results.

For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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