Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Thursday, February 07, 2013

Tax Diversification

At the end of 2012, people were still not sure what income tax rates would be now. Diversifying the tax status of your investments makes sense in the face of uncertainty about future tax rates. While deferring income into a 401(k) or IRA is great for saving on taxes now, a Roth IRA will save you on taxes later. Adding a taxable brokerage account gives you long-term savings that you can access at any time.

The new year brings new retirement account contribution limits. This is a welcome boost from the $5,000 limits that have been in place since 2008. The new contribution limits for 2013 are as follows:
  • Traditional and Roth - $5,500
  • SIMPLE IRA - $12,000
  • 401(k) – $17,500
  • SEP IRA - $51,000
  • If you are over 50, catch up contributions are still the same.
All contributions are limited by your total taxable income, and the SEP IRA is limited to 25% of your income. There is more information on our website, and check with your CPA or tax preparer for more details.

Remember, if you contribute to a Traditional, SIMPLE, SEP or 401(k) account, your contributions are tax deductible. This gives you instant savings on your taxes!

Tax rates are still favorable for investing, so even saving in a taxable account is worthwhile. With IRAs, Roth IRAs and taxable accounts giving you more options on the tax status of your accounts, diversification between account types is still an excellent idea.