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Tell me how the Lifetime Planner uses tax-deferred savings information

The Lifetime Planner uses tax-deferred savings information to estimate the amount you'll have in your tax-deferred plans when you retire. If you do not have sufficient savings, some of your retirement funds must come from other sources (such as Social Security, pensions, selling investments, and so on).

The Planner enforces the contribution limits for different tax-deferred accounts as they calculate your future savings. In most savings plans, the maximum contribution you can make is limited to a percentage of your salary or to a set dollar amount. The Planner does not reduce your yearly taxable income by your tax-deferred savings. Your average income tax rate should reflect the tax reduction.

Partly tax-deferred savings plans

With a partly tax-deferred plan, you invest with money you have already paid taxes on, but the investment gains you accumulate are tax-deferred. A common partly tax-deferred plan is a commercial tax-deferred annuity, sold outside a pension plan.

Fully tax-deferred savings plans

With a fully tax-deferred plan, you don't pay income taxes on the money that you earn and save. Neither do you pay taxes on your investment gains until you withdraw the money from your plan.

Common fully tax-deferred savings plans are:

  • Individual Retirement Accounts (subject to income limits)
  • SEPs
  • Keogh plans
  • 401(k)s and 403(b)s
  • Tax-sheltered annuities that are part of company retirement plans

Notes

Sometimes, even though you entered future tax-deferred savings plans, your tax-deferred savings for the year are $0. This is due to one of two causes:

  • You don't have any salary income in that year. Your contributions to most plans are limited by your salary. For example, you can't make the full $2,000 contribution to an IRA unless you earn at least $2,000 in salary. You may have forgotten to enter a salary for that year or you are planning on not earning a salary, which means you can't make tax-deferred contributions.
  • You select the wrong employment status for your job. You can make Keogh plan or Self-Employed SEP contributions only when you have selected self-employed status. You can make 401(k), 403(b), or SEP for Employee contributions only when you select regular employee status.

Statutory limits may be changed at any time during the year. You and your financial advisor are responsible for staying current on tax laws and interpreting their impact on your personal situation.


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