But there’s another thing to look out for that can have the same disastrous effect on your retirement plans - Uncle Sam.

Most of us do our retirement investing with the goal of accumulating as much money in our retirement savings account as possible. When we think about taxes and our retirement investments, we generally are thinking only about whether or not we should invest with “pre-tax” dollars, use “tax-free” investments and so forth. We figure that later, when we start drawing on our retirement investments, we’ll worry about the taxes then and that, somehow, it won’t be a big deal because we supposedly won’t be in as high a tax bracket.

The truth, though, is that, without properly planning our retirement investing planning, Uncle Sam could take as much as 90% of your retirement funds!

As an example, once you reach 70 1/2, you have to begin withdrawing required minimum distributions from your retirement plan. If you don’t, you’ll have to pay a 50% penalty tax on any part of the required minimum distribution that you don’t withdraw.

If you’re still working, however, you can delay beginning your required minimum distributions until you do retire. (There are two exceptions, however. If you own at least 5% of the company or if your plan is an IRA, you have to begin taking your required minimum distribution even if you’re still working.)
Also, be aware that the payments you receive from ordinary retirement funds are taxed at regular income tax rates upon withdrawal. There’s no special ‘retirement rate’.

These payments are added to your total annual income and then taxed at the rate that applies to your income tax bracket. So, if you received a salary or earned significant income from sources other than your retirement plan, your retirement plan distributions may actually put you in a higher tax bracket than when you were simply working.

Then there is the so-called Death Tax. That is the taxes on your retirement investments that will apply should you die. They could eat up a huge portion of what you intended to leave to your heirs. One common solution nowadays is to buy a life insurance policy that will offset the estate taxes that will be charged on your Individual Retirement Account or IRA.

For many people, your tax situation in retirement could actually be more complicated than it was while you were working. And, if you’re like most people, you haven’t even thought about it. So start thinking. Consult with a professional. It’s money well spent, and if you plan to leave any serious amount of money to your heirs, they will appreciate your thoughtfulness and the fact that more money will pass to them and less will go to Uncle Sam.

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401(a) plans, also called Teacher Incentive and Teacher Matching plans, are designed specifically for school employees.

The rules covering 401(a) plans vary from state to state and can vary within a school district so that, say, teachers get one benefit while custodians or paraprofessionals can get quite a different one. Distributions can take several forms, including lump sum, rollover or an annuity type payment.

If you change jobs, you have the flexibility to consolidate your savings in another public sector employer’s 401(a) plan or 401(k) plan, a tax-sheltered 403(b) annuity plan, a 457 plan, or a traditional Individual Retirement Account or IRA.

Probably the 401(a) most people are familiar with is from TIAA-CREF. Fidelity is another major player.

403(b) plans are very similar to a 401(k) plan. The biggest difference is who is eligible to participate. While a 401(k) plan covers private-sector workers, only employees of public schools and 501(c)(3) tax-exempt organizations can participate in a 403(b) plan.

Also, unlike the 401(k), 403(b) plan members can’t invest in individual stocks. They have money taken out of their paychecks on a pretax basis, which is then handled by a financial institution chosen by their employer. Like in a 401(k) plan, the money grows tax-deferred until retirement and is then taxed as ordinary income when withdrawn.

Generally, the maximum contribution is $10,500 or 20% of salary, whichever is less, but they do allow for a catch-up in contributions. If you did not max out your contributions in previous years, you can contribute more than the maximum with certain annual and total restrictions.

You may have heard 403(b) plans referred to as Tax Deferred Annuities or Tax-Sheltered Annuities. Those names come from back when the only investment options offered were for annuities, but investment options have been expanded for decades to include mutual funds.

If you’re eligible, all these plans can make a worthwhile addition to your retirement investing options.

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