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Avoid Hidden Tax Triggers When Planning for Retirement
Jill Perlin
Prudential annuities
T
ax season is upon us
— but before you
break out that box of
old receipts in search of
every last deduction, think
about whether you’re taking
advantage of all the tax ben-
efits associated with saving
for retirement.
cash in the assets.
These types of assets
carry two hidden tax risks,
too.
The first, turnover, afflicts
investments like mutual
funds. Over the course of a
year, managers buy and sell
securities to ensure that the
fund adheres to its stated
objective and to lock in
gains on securities within
Are you needlessly paying
taxes now on income that you
may not actually use until
sometime in the future?
Your nest egg can general-
ly be divided into three cat-
egories, at least from a tax
perspective: assets that are
taxed now, those that carry
special tax advantages, and
those that will be taxed
later.
Assets that are taxed now
include mutual funds,
stocks, and certificates of
deposit. They’re purchased
with after-tax income, and
investors pay short- or long-
term capital gains taxes on
their profits after they sell or
the fund. So if a fund adver-
tises a turnover ratio of 25
percent, then the managers
executed trades that repre-
sented one-quarter of the
fund’s total assets.
Turnover can trigger capi-
tal gains — which investors
must pay taxes on.
The other hidden tax risk
is rebalancing. Many people
sell assets that have grown
in value and then buy secu-
rities whose value has
decreased in order to bring
their overall asset allocation
back into balance.
For instance, if mutual
fund A jumps in value while
mutual fund B plunges, then
fund A will comprise a
greater percentage — and
fund B a lesser share — of
an investor’s portfolio.
Selling A and buying B can
allow an investor to position
his portfolio in line with its
original
strategy.
Unfortunately, the gains on
the sale are taxable.
With these risks in mind,
it’s worth asking yourself
whether you’re needlessly
paying taxes now on income
that you may not actually
use until sometime in the
future.
In short, are you capitaliz-
ing on tax-advantaged and
tax-deferred savings vehi-
cles? That is arguably the
single-best way to take con-
trol of your tax risks. It also
has the salutary effect of
maximizing your retirement
income.
Tax-advantaged assets
include such vehicles as
Roth Individual Retirement
Accounts (IRAs). Investors
contribute to a Roth IRA
with after-tax income but
can typically withdraw their
money — including any
gains — tax-free as long as
they comply with certain
requirements.
On the downside, the
assets within a retirement
account are subject to the
vagaries of the market.
Savers are also subject to
income and contribution
limits when using Roth
IRAs.
Traditional IRAs, quali-
fied retirement plans like
401(k)s, cash-value life
insurance, and annuities
represent types of assets that
are taxed later. Some of
these savings vehicles
require a saver to withdraw
a portion of the funds once
he reaches a certain age.
When withdrawn, the pro-
ceeds are generally taxed as
regular income.
Of this third category,
annuities provide savers
with the greatest flexibility.
Holders of annuities can
control their tax burden, as
they don’t pay taxes on any
earnings until they with-
draw funds. They also have
access to professionally
managed
investment
options and can avoid the
tax risks associated with
rebalancing their portfolios.
Further, annuities are the
only vehicle that can pro-
vide savers guaranteed
retirement income that’s
insulated from potential
market downturns, while
leaving the possibility of a
death benefit for an
investor’s heirs.
Of course, the tax treat-
ment of an asset is just one
criterion for evaluating an
investment, and assets of all
kinds merit inclusion in a
saver’s portfolio. But as you
prepare your taxes this year,
consider how you might be
able to benefit from tax-
advantaged
and
tax-
deferred savings vehicles.
Jill Perlin is vice presi-
dent of client effectiveness
and education at Prudential
annuities.
Prisoners
continued from page 1
decades. The total cost of incarcerating state inmates
swelled from $12 billion in 1988 to more than $50 billion
by 2008.
Washington faces a $5 billion budget deficit, and that has
politicians looking for savings in the cell blocks.
State Sen. Adam Kline, D-Seattle, has proposed early
release of some inmates who have not committed sex
offenses, murder, or certain drug offenses. An inmate with
low risk to reoffend could see 120 days shaved off a sen-
tence under the proposal, while a high risk, but nonviolent,
inmate would get 60 days off.
Some of the saved money would be used for treatment
and education programs that lower recidivism rates, Kline
said.
“A person with a high likelihood of committing a violent
offense isn’t going to be allowed to be released under this
We honor the many
accomplishments of
African Americans.
Page 8 The Portland and Seattle Skanner april 6, 2011
program,’’ Kline said.
Proponents say the state could save $6.6 million in the
next two years, a tiny percentage of the deficit. Prosecutors
oppose the measure.
Kline said his bill would reduce the daily prison popula-
tion by about 3.5 percent. It costs about $37,000 to keep a
prison inmate in Washington. A study conducted by the
Washington State Institute for Public Policy found that the
bill would result in 3,700 fewer crimes over the next 20
years, saving taxpayers $35 million, assuming rehabilita-
tion works.
In Washington, discussions about reducing the prison
budget come amid the horrific backdrop of the murder of a
female corrections officer on Jan. 29. Jayme Biendl was
strangled by an inmate while working alone in the chapel at
the Monroe Correctional Complex.
While prison officials have said Biendl’s murder was not
related to state budget cuts, which had yet to impact
Monroe much, the case has become something of a politi-
cal football.
The union representing corrections officers is demanding
a series of reforms, some of them expensive, to make the
job safer.
A report by the National Institute of Corrections provided
15 recommendations, and a bill to implement some of those
has been introduced in the state House.
The bill would reform offender classification at each
facility; authorize a study of the use of personal body
alarms and proximity cards for guards; hire a consultant to
study the use of more video monitoring cameras in prisons;
and authorize a pilot program on the expanded use of pep-
per spray. The cost of the various studies is about $2.7 mil-
lion. But full implementation of items like monitoring cam-
eras and body alarms would cost millions of dollars, the
House Public Safety committee was told Wednesday.
“We have been urging the state for years to make these
changes, but our input has fallen on deaf ears,’’ said Lynn
Kunkle, a nurse at Monroe and member of Teamsters Local
117, which represents prison workers. “It’s disturbing that it
takes the murder of one of our co-workers before the state
promises to take action.’’
Union officials contend state budget woes are making
their jobs more dangerous, said Tracey Thompson, chief
executive officer of the union. For instance, the union con-
tends that too many prisoners are being reclassified by
administrators from violent to nonviolent, allowing them to
be placed in the general population.
This year, the union is pushing hard for legislation that