Integrating Retirement Accounts with Other Assets
Once you identify your personal financial retirement profile, you can move to the next level on the financial planning for retirement. Many people accumulate different types of property for pension that can be used for retirement. The type of property one owns and its tax characteristics can be important in creating an overall retirement strategy that fits well into Level III of the financial pyramid. Let’s take a look at how to create efficiency and diversification in an integrated program.
The first aspect of integration is to remember that distributions from a qualified retirement plan or IRA are taxed as ordinary income (except for a Roth IRA). The maximum marginal federal income tax rate in 1998 is 39.6%. This means that the type of pension plan asset owned by a qualified plan or IRA does not affect income pension tax. It is all treated the same for tax purposes, regardless of whether the retirement account consists of stocks, bonds, mutual funds, annuities, or money market accounts. However, financial products owned personally (outside of a qualified plan) can be taxed differently. Interest and dividend income are taxed as ordinary income and appreciation of long-term capital assets is taxed at favorable capital gains rates.
Let’s assume you’re a participant in a 401(k) plan or own an IRA so that you have some degree of control over the type of products you can purchase. Let’s further assume you want to diversify your investments between growth funds and income funds. Barring other prohibitive factors, it would make sense to purchase assets taxed at capital gains rates outside a qualified plan and purchase income funds inside the qualified account. This way you can take advantage of favorable capital gains rates.
The cash value life insurance policy you may have purchased can serve two functions. First, the death benefit may still be needed to help protect your beneficiary. Second, the cash value build-up of the policy can be used as part of your allocation of safety of principal. Once you have enough of a financial base, you can allocate resources to other financial products that are more in line with your overall goals.