A Tax-Advantaged Retirement

AC: 18293-0713-6725 This presentation is the property of ICMA-RC and may not reproduced or redistributed in any manner.

2 Confidential and Proprietary

Tax Advice

ICMA-RC does not offer specific tax or legal advice.

Each individual’s tax situation is different. What makes

sense for one individual may not for another.

Consider consulting a qualified tax professional about

your tax situation as it may relate to information included

in this presentation.

3 Confidential and Proprietary

Tax Rules

Tax Planning Action Items

Plan for taxes – a potentially major expense

Understand the rules – look for ways to wisely

manage current and future tax bills

Seek help – consider working with a qualified

tax professional

* Except where noted, references to tax rules refer to IRS federal level.

State and local tax rules may differ.

4 Confidential and Proprietary

What Taxes?

2013 Tax Rates Married Taxpayers Filing Jointly Individual Taxpayers

Tax Rate of… …applies to each $ of taxable income that is between/over…

10% $0 – $17,850 $0 – $8,925

15% $17,851 – $72,500 $8,925 – $36,250

25% $72,501 – $146,400 $36,251 – $87,850

28% $146,401 – $223,050 $87,851 – $183,250

33% $223,051 – $398,350 $183,251 – $398,350

35% $398,351 – $450,000 $398,351 – $400,000

39.6% $450,001+ $400,001+

1. Your income is federally taxed at different rates

Taxable Income

– all your income

subject to tax,

minus deductions

and exemptions

In making financial decisions, consider consequences

of being bumped into higher tax brackets

5 Confidential and Proprietary

What Taxes?

2. Retirement account withdrawals…

Need $10,000, withdraw $10,000

If pay 25% Federal + 5% State income tax

= $3,000 in taxes!*

Must consider $14,285 withdrawal to receive

$10,000 after taxes

* For illustrative purposes only. Roth assets: n/a to distributions of contributions or, if qualified,

earnings. Withdrawals of after-tax or non-deductible contributions made to 401 plans and IRAs

are also not subject to tax.

IRS requires 20% withholding on 457/401 plan distributions

– but you may owe more (or less)

6 Confidential and Proprietary

What Taxes?

2. Retirement account withdrawals – penalty

taxes may apply pre-age 59½

• Exception for 457 plans* – but lose automatic

exemption if transfer to non-457 plan

• Age 55 exception – 401 plans

• Other exceptions possible – 401 plans,

IRAs…see IRS Instructions for Form 5329

* 10% penalty tax never applies to withdrawals of original 457 plan contributions and associated earnings. But penalty may apply to non-457 plan assets rolled into a 457 plan and subsequently withdrawn prior to age 59½.

Early withdrawals should be last resort –taxes and

increased risk of outliving assets

7 Confidential and Proprietary

What Taxes?

3. Non-retirement assets – interest, dividends

• Generally taxed at regular tax rates

• Stocks – qualified dividends currently taxed at

lower long-term capital gains rates

• Municipal Bonds – interest income not subject

to federal income tax but taxes may still apply

If subject to AMT

Federal capital gains taxes

State income taxes

8 Confidential and Proprietary

What Taxes?

3. Non-Retirement Assets – Capital Gains

• Tax on profits – all assets

• Sell individual asset or distributed by mutual fund

• Lower tax rate apply if held more than 1 year1

• Primary residence – profits may be tax-free2

Proceeds from Sale

– Basis (amount you already paid)

= Capital gain

1 Exception: certain assets such as collectibles and real estate subject to depreciation 2 Limits: $250,000 single filer owner; $500,000 married filing jointly owners. Must have

been primary residence for 2 of last 5 years. See IRS Publication 523.

Evaluate…tax bill vs. economic benefit of sale

9 Confidential and Proprietary

What Taxes?

Social Security Benefits Single Filer Married Joint

Up to 50% taxable $25,000-$34,000 $32,000-$44,000

Up to 85% taxable $34,000+ $44,000+

4. Your investments can trigger taxes

on Social Security

½ Social Security Benefits

+ Other income = $____

IRS Publication 554: Tax Guide for Seniors

When making decision that increases taxable income,

weigh the potential impact on Social Security benefits

10 Confidential and Proprietary

What Taxes?

5. And they can trigger higher Medicare

premiums

• Part B & D surcharges if just

$1 over income limit

$85,000+ (single) or $170,000+ (married)

• Based on 2 years prior tax return

For 2013 premiums, look at 2011 tax year

When making decision that increases taxable income,

weigh the potential impact on Medicare premiums

11 Confidential and Proprietary

What Taxes?

6. Required Minimum Distributions

• Yearly, taxable withdrawals upon age 70½

Initially, about 3.6% of account value

Rises yearly – 5.3% at age 80, 8.8% at age 90*

• 457/401 plans, Traditional IRAs. Exceptions:

Roth IRAs

If still working (current employer’s plans only)

• If fail to take, subject to 50% penalty

12 Confidential and Proprietary

Plan for Taxes

7. And your taxes may have increased in 2013

• Ordinary income taxes

• Payroll taxes

• Capital gains

• Qualified stock dividends

• Extra tax on wages and investment income

• Estate/gift taxes

Likely to impact higher-income individuals at a minimum

13 Confidential and Proprietary

A Tax-Free Retirement?

A tax-free retirement? No free lunch

• Be wary of strategies designed to avoid taxes

“..in the 1970s, investors were lured onto tax-shelter shoals…

A lot of them were bad deals that wound up costing more than

paying the taxes would have.”

―independent tax expert Robert Willens*

• Don’t make decisions based solely on taxes

* As cited in Wall Street Journal, “Getting Ready for Higher Taxes.”, Feb. 27, 2010

Which would you rather have… 25% tax on 6% return?

Or 0% tax on 0% return?

14 Confidential and Proprietary

A Tax-Advantaged Retirement

But you can be smart about taxes – evaluate…

Tax-advantaged retirement plans

Roth contributions, conversions

Withdrawal strategies

Where you live

How your non-retirement accounts are invested

Life insurance

15 Confidential and Proprietary

Tax-Advantaged Retirement Plans

Your Employer Plans, IRAs

Pre-tax, or tax-deductible, contributions

– lower current year tax bill

Tax-deferred earnings – avoid tax until withdraw

Roth contributions – no up-front tax benefit but

future withdrawals may be tax-free

Evaluate benefits of diversifying your taxes with pre-tax

and Roth contributions

16 Confidential and Proprietary 16 Confidential and Proprietary 16

Tax-Advantaged Retirement Plans

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

457 Plan IRA

$17,500

$23,000

$35,000

+$1,000 if age 50 or over as of year-end

$6,500

$5,500

You may be able to contribute

accrued sick & vacation leave

+$17,500 during each of the three years prior to your normal retirement age*

* “Normal retirement age,” as defined in the plan and based on extent to which maximum contributions not made in previous years. If you elect this “pre-retirement” catch-up, you cannot also elect the age 50” catch-up.

+$5,500 if age 50 or over as of year-end

Contribution Limits – 2013

17 Confidential and Proprietary

Roth Conversions

• Receive tax-free distributions that don’t impact

Medicare premiums, Social Security benefits

• Not subject to RMDs

• Tax-free assets for heirs

Adding to Roth assets through Roth conversions –

pay taxes now for tax-free withdrawals later?

Traditional IRA

or

Employer Plans

Roth IRA Taxes owed*

* If subsequently withdraw Roth assets within a 5-year period and you are under the age of

59½, you are subject to a 10% penalty tax. Note: each conversion carries its own 5-year limit.

18 Confidential and Proprietary

Roth Conversions

Roth Conversion Strategies

Consider partial conversions of existing assets –

to avoid bump to a higher tax rate

Contribute to a Traditional IRA and then convert*

Avoid paying taxes out of the converted assets

Consider impact of the conversion tax bill on

Social Security benefits, Medicare premiums

* No taxes owed on non-deductible Traditional IRA assets converted. However, per IRS rules,

you cannot single them out. The tax-free percentage of the conversion is determined by dividing

any non-deductible contributions by the total balance of all non-Roth IRA assets owned.

19 Confidential and Proprietary

Withdrawal Strategies

Withdrawal order rule of thumb

Taxable accounts + any RMDs

Tax-deferred accounts

Roth accounts

Objective: maximize potential tax benefits

20 Confidential and Proprietary

Withdrawal Strategies

Withdraw sooner

Roth assets to avoid higher tax brackets

Tax-deferred assets in low tax-bracket years

Withdraw later

Taxable account assets with large gains

But consider these withdrawal order exceptions

May make sense to withdraw a mix of pre-tax,

Roth, taxable assets based on your specific situation

21 Confidential and Proprietary

Where You Live

Where you live in retirement…project state taxes

• Some states have no income tax…but may make

up the difference elsewhere

• Consider all taxes that may apply to you

• Also consider the overall cost of living

22 Confidential and Proprietary

If You Live and Stay in Colorado

• Income taxes apply but relatively low rate

• Sales taxes relatively low at state level…but

higher local taxes may apply, too

• Retirement income tax exemptions – Social

Security, pension benefits

• Property taxes – partial exemption for age 65+

who have owned/lived in home 10 years

• No estate/inheritance taxes

23 Confidential and Proprietary

Non-Retirement Accounts

Own non-retirement account assets?

Average stock fund shareholder, 2000-2009, owed taxes

equal to about heir returns

* Source: Lipper data cited in Wall Street Journal, “Tax Bomb Threatens Funds”, May 15, 2010.

2000-2009 – investors in average stock fund earned 1.99% pretax annualized return. Taxable

shareholders surrendered about half that return to taxes.

Source of non-retirement investments –

extra savings, inheritances, RMDs

24 Confidential and Proprietary

Non-Retirement Accounts

Investments that tend to generate larger tax bills –

hold in retirement accounts

Lower tax-bill investments

Higher tax-bill investments

Taxable Accounts

Retirement Accounts

25 Confidential and Proprietary

Non-Retirement Accounts

Examples of tax-efficient, mutual fund

investments

Stocks – broad-market index, tax-managed, and

other funds that tend not to trade a lot

Municipal bonds – tax-exempt bond funds

• Generally not suitable if in low tax bracket

26 Confidential and Proprietary

Non-Retirement Accounts

Be strategic – “harvest” tax losses

• Sell investments at a loss – offset capital gains,

ordinary income

• Caution – could end up paying more

when sell later

• Consider especially for assets you plan to gift

to charity or heirs

27 Confidential and Proprietary

Life Insurance

Life insurance has tax advantages but at a cost

• Tax benefits

Tax-deferred cash value can borrow against

Death benefit to heirs, tax-free, upon your death

• But…

Costs – often takes 20 or so years to realize any

gains because of commissions, fees early on

Loans reduce death benefit

If policy lapses/surrendered, loan amount

may be taxable

Evaluate carefully –

seek qualified, independent opinion

28 Confidential and Proprietary

Plan Sponsor Checklist

Help educate – taxes are a key expense to plan

for in retirement

Help diversify tax situation

Add Roth contribution and conversion provision for

sponsored retirement plans (n/a to 401(a))

Adopt Payroll Roth IRA

Help keep perspective – disciplined saving and

investing are critical

29 Confidential and Proprietary

Learn More

THANK YOU

• www.irs.gov

• Qualified tax professional