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Tax-smart retirement planning

In the past, companies supplied retirement funds for their employees through defined-benefit pension plans that paid a set amount to retirees. Today, those plans are rare, and employers are increasingly shifting the responsibility for retirement savings to the employee. That means that workers must take an active role in planning -— and saving -— for their retirement.

The good news is that there are many tax-advantaged options that can enhance the growth and earnings power of your retirement nest egg, according to the Maryland Association of CPAs.

Don’t overlook the 401(k)

Company-sponsored 401(k) plans offer tax advantages and an easy way to automatically accumulate retirement money, so they’re well worth investigating.

In a 401(k), you choose a percentage of your salary, up to an annual limit, that is set aside in an investment retirement account. Employees over age 49 may make additional catch-up contributions. You save money on the contribution because it is not taxed in the year you earn it.

In addition, you don’t have to pay taxes on the earnings on your money until distributions are made -- a time when you’ll likely be in a lower income tax bracket. Distributions made before age 59 ½ generally also are subject to a 10 percent penalty for premature withdrawals.

Choose wisely

Not all 401(k) plans are alike, however, so you should examine your investment options under the plan. Look for a reputable investment manager and fund choices that enable you to pick an investment that meets your risk tolerance and investment goals. And monitor the plan’s performance to see if it’s time to move into a different investment.

Take advantage of employer matching

Many employers will deposit a certain amount to your retirement plan based on your own contributions. For example, a company might match 50 percent of your contribution up to 6 percent of your salary deferral. The company match essentially amounts to a tax-free bonus, so it’s well worth contributing enough to your account to qualify for the match.

Open an individual retirement account

401(k) accounts are great investments because of the employer match and because the maximum contributions are
typically higher than those of IRAs. However, if your employer does not provide for a 401(k), you should consider opening an individual retirement account. There are two basic choices:

• With a traditional IRA, your contributions are tax deductible provided you receive compensation that is includable in income and are not age 70½ or older during the tax year. Amounts earned are not taxed until distributions are made.
• In a Roth IRA, the contribution itself is never deductible. However, the earnings and price appreciation generally are free from income tax when money is withdrawn from the account. 

Your choice of an IRA will depend on your financial situation and what you expect your tax burden to be when you retire. No matter which you select, remember to consider a spousal IRA if you are married and filing a joint return. Even if only one spouse is employed, the other spouse is generally allowed to make an IRA contribution as well, which is a great opportunity to expand your family’s tax-deferred retirement savings.

If you are unsure of the best retirement options, be sure to turn to your CPA with questions on retirement and any other important financial issues facing your family.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.