A little planning can bring you significant savings

Rochester Business Journal
NOVEMBER 28, 2014
Mark Armbruster

Year end is right around the corner—a time when a young man’s fancy lightly turns to thoughts of, well, tax planning.

For most of us, the thought of tax planning is enough to either make us glaze over in a daze of boredom and confusion or send us screaming for the exits as we wait for the annual fleecing by the tax man. However, there are steps you can take to minimize your tithe to Uncle Sam. Some of these can be done at year end, but most strategies are best if applied throughout the year.

The first step is to minimize income. That sounds counterintuitive to those of us who are trying to save and get ahead, but I’m not talking about giving up income, just adjusting the timing and nature of it. There usually isn’t much you can do about earned income from your job, apart from making sure you max out your 401(k) plan contribution. However, if you are over age 62, you may be eligible for Social Security benefits. If you are still working, it may be best to defer Social Security at least until after age 66 in order to reduce the amount of taxes you could owe. Deferring until age 70 may be better still.

Similarly, while you can start to draw money from qualified retirement accounts, such as Individual Retirement Accounts, Simplified Employee Pension plans, and 401(k) plans at age 59 1/2 without penalty, you may be better waiting if you have other sources of funds to meet your living expenses. Retirement account withdrawals are generally taxed at ordinary income tax rates; this additional income has the potential to push you into a higher tax bracket. It may be best to wait until age 70 1/2, when required minimum distributions must be taken.

For those relying on investments to meet their living expenses, many investors attempt to maximize the income their portfolio produces through dividends from stocks and interest from bonds. But there’s a better way.

Rather than maximizing income, they should think about how best to grow their assets, and then how to access those assets in the most efficient manner…