Your Taxes

Taxes are unavoidable, but mismanaging taxes can result in losing large sums of money to the government unnecessarily. By understanding how tax-efficient strategies can affect your retirement, you can keep more of your savings for yourself.

Retirement plans typically include either pre-tax investments, which help increase savings in your pre-retirement years or after-tax investments, which may help reduce your tax burden during retirement. Generally, your retirement income should come from both pre-tax and after-tax investments.
Pre-tax investments

Pre-tax investments, such as 401(k)s and traditional IRAs, are also described as "tax-deferred." They allow you to postpone paying taxes on the amount you contribute and the earnings that are generated as long as they remain in the account. When you withdraw funds at retirement, you'll pay taxes on them.

Potential advantages:

* The account value may grow faster than a comparable taxable investment since the earnings in the account can grow tax-deferred.
* When you do pay taxes later, there's a chance you'll be taxed at a lower rate if your taxable income is taxed at lower rates than in your working years.

After-tax investments

A Roth IRA is an after-tax investment that can create a source of tax-free income in the future. Contributions are not tax-deductible in your saving years, but tax-free withdrawals can help reduce your total taxable income when you reach retirement.
Tips for managing taxes more effectively

A key goal of tax planning is to reduce your taxable income — and your effective tax rate. There are a number of strategies to consider:

* When working, deduct as much pre-tax from your gross pay as possible. Max out your 401(k) contributions and take advantage of company benefits such as payroll deductions for flexible spending accounts, transportation, supplemental insurance, etc.
* Focus on long-term capital gains, which are taxed at lower rates than short-term capital gains or ordinary income.
* Sell securities in non-qualified accounts that are losing money in order to deduct the losses against realized capital gains and up to $3,000 of an individual's ordinary income each year and lower your current tax bill.
* Approach charitable giving in the most advantageous way. For example, you might be better off giving an asset — such as appreciated stock — to a charity, rather than a cash donation. You may get a tax deduction for the full value of the asset, and a non-profit charity could sell it without incurring capital gains tax on the appreciation.
* Think ahead to estate planning to minimize the impact of estate taxes. Annual gifting is one way to reduce the value of your taxable estate. For 2009, the annual giving exclusion allows each donor to give up to $13,000 to an unlimited number of donees without paying federal gift tax. Over time, that may be a strategy you should employ to remove assets from your taxable estate.

The tax landscape changes frequently as rates, limits and thresholds adjust, and provisions are introduced or expire. An Ameriprise financial advisor, working with your tax professional, can recommend tax-efficient strategies that are customized to your individual situation, whether your assets are still growing or are already generating retirement income.