Tax-efficient savings for retirement

It's easy to live comfortably in retirement, in theory. You simply save and invest as much as you can right now. Yet, in practice, it's not that easy. Fortunately, Uncle Sam offers a variety of investments and retirement vehicles that can reduce the tax burden on funds set aside for your retirement.

Solution 1: company retirement plan
Company 401(k) and other qualified retirement plans offer a simple opportunity to build a substantial retirement nest egg. Your contributions are carved out of your salary, free of income tax, and the earnings grow tax-deferred. Income taxes will be due upon withdrawal at ordinary income tax rates.* Many employers even offer a match on your contributions.

For 2009, the maximum 401(k) contribution is $16,500 – $22,000 for those ages 50 and over. Your contribution limits are not affected by the
employer match.

Solution 2: municipal bonds
Income from tax-exempt municipal bonds is exempt from federal tax. Usually, interest is also exempt from state income tax in the state where the bond was issued. Thus, when evaluating investments for the bond portion of your portfolio, you should compare the after-tax return on an investment in taxable bonds with the lower return of municipal bonds, in order to determine which bonds offer you the greater opportunity for savings.

Solution 3: IRA choices
Individual retirement accounts (IRAs) offer another savings option.^† With a traditional IRA, you may be able to deduct your contribution from your taxes.** The full amount of your withdrawals is taxed, except to the extent that they represent nondeductible contributions.* There also are mandatory withdrawals after age 70½.

You may contribute to a Roth IRA regardless of your participation in a company plan, but contributions are never tax-deductible and you must meet income limits for eligibility.*** For a Roth IRA there is no tax on withdrawals and no mandatory withdrawals. However, for tax-free withdrawals of earnings, you must have owned the Roth IRA for at least five years and be at least 59½ years old.^†

For 2008 and 2009 tax years, the contribution limit for any combination of traditional and Roth IRAs is $5,000 ($6,000 for those ages 50 and older). You may allocate your contributions between them in any way that you wish.

To learn more about how we can help you with your retirement planning, please call one of our Financial Advisors^†† at 735-1717 (Oahu) or toll-free at (888) 343-5539 (Neighbor Islands and Mainland).