1/14/2025
Tax Tips for Your Retirement Accounts
Retirement is a chapter of life that, for some, may signal leisure, freedom, and working by choice, not necessity. However, this phase usually requires retirement income from retirement savings withdrawals. Different retirement account types have different taxation when withdrawing monies: taxable, tax-deferred, and tax-free.
This article discusses investment strategies and taxation, which affect any growth and value of retirement savings accounts.
Taxable Accounts
Taxable accounts have fewer restrictions on contributions and withdrawals, but any returns are subject to taxation. Investing in taxable accounts is done with after-tax money and includes:
- Brokerage accounts
- Individual stocks
- Real estate and other hard assets (metals)
- Mutual funds, exchange-traded funds (ETFs), index funds
Tax-deferred Accounts
Traditional Individual Retirement Accounts (IRAs) and 401(k)s are the most common retirement savings accounts and offer tax-deductible contributions. A tax deduction implies that the amount contributed to these accounts is deducted from taxable income for that year, thereby reducing one's tax bill. If you fall into a high tax bracket, the tax savings from making these deductions can be substantial.
However, while traditional IRAs and 401(k)s result in tax savings in the present, the distributions from these accounts are tax-deferred. Upon withdrawing funds, the monies are subject to income tax at one's current tax rates. Therefore, tax-deductible contributions must be weighed against future withdrawals and taxes.
Tax-free Accounts
Tax-free accounts are where Roth IRAs and Roth 401(k)s come into the retirement income picture. These account contributions require payment of taxes upfront, but the distributions during retirement are tax-free. Therefore, if you anticipate a higher tax rate in retirement, a Roth IRA or a Roth 401(k) may provide a more beneficial tax situation.
How Taxes Impact Earnings
Next, it's essential to consider the impact of taxes on investment earnings within retirement savings accounts. In most accounts, investment gains, whether in interest, dividends, or capital gains, are tax-deferred.
Understanding how taxes impact specific retirement savings accounts is vital to one's retirement planning strategy. When selecting retirement savings vehicles, they must align with one's goals, situation, current and expected future tax rates, and anticipated investment returns.
For example, contributing to a traditional IRA or a 401(k) with tax-deferral on any growth allows your investments to compound faster since the money usually allocated to taxes remains in your account to generate further growth potential. However, just like distributions from contributions, withdrawals from investment earnings are typically taxed as regular income in retirement.
In contrast, Roth IRAs and Roth 401(k)s offer tax-free investment growth potential. Contributions are tax-free, and any gains are also tax-free upon withdrawal. These accounts may appeal more to individuals who prefer tax-free distributions.
Let's Team Up
It's essential to have an in-depth comprehension of the interplay between taxes and retirement savings accounts. Your financial professional can help you understand how taxes may impact your retirement strategy now and in retirement. Schedule a retirement tax planning review today.
Note: Due to the Martin Luther King, Jr. holiday, we will not be distributing WMC next week.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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the markets-
returns through 1/13/2025
With different data sources telling different stories, last year was confusing for labor market observers. The closely watched Jobs report, for example, leverages two surveys: the establishment survey and the household survey. While both surveys showed impressive job growth in December 2024, the longer-term trends diverge. Since March 2022, the U.S. has added 8.2m jobs according to the establishment survey, but just 3.5m based on the household survey.
Methodology is to blame for this divergence. The establishment survey counts jobs based on business and agency payrolls, allowing it to capture the impacts of immigration. That said, statistical techniques used to estimate the impact of business formations and closures can sway these figures. The household survey, however, weights sample responses from households using population data from the Census Bureau. Unfortunately, the Census Bureau has struggled to accurately capture the surge in immigration, leading it to understate population growth. Fortunately, annual benchmark revisions in February should help clear some confusion. The 2Q24 Quarterly Census of Employment and Wages, which informs the establishment survey revisions, showed 790k fewer jobs were created in the year ending March 2024 compared to current figures. Moreover, Vintage 2024 Census estimates, which will be applied to this month's household survey data, not only revised net immigration estimates higher by 1.8m for the two-years ending June 2023, but also showed that net immigration totaled a higher-than-expected 2.8m for the year ending June 2024.
As immigration’s impacts crystalize, so too should our view of the labor market. It might look modestly softer, but investors should remember it still supported solid growth in 2024. This should remain the case in 2025 as solid corporate earnings and steady economic activity allow employers to add an average of 150k jobs each month.
Chart of the Week: BLS, FactSet, J.P. Morgan Asset Management.
Thought of the Week: BLS, Census Bureau, FactSet, J.P. Morgan Asset Management.
Abbreviations: Cons. Sent.: University of Michigan Consumer Sentiment Index; CPI: Consumer Price Index; EIA: Energy Information Agency; FHFA HPI: - Federal Housing Finance Authority House Price Index; FOMC: Federal Open Market Committee; GDP: gross domestic product; HPI: Home Price Index; HMI: Housing Market Index; ISM Mfg.
Index: Institute for Supply Management Manufacturing Index; PCE: Personal consumption expenditures; Philly Fed Survey: Philadelphia Fed Business Outlook Survey; PMI: Purchasing Managers' Manufacturing Index; PPI: Producer Price Index; SAAR: Seasonally
Adjusted Annual Rate
Index: Institute for Supply Management Manufacturing Index; PCE: Personal consumption expenditures; Philly Fed Survey: Philadelphia Fed Business Outlook Survey; PMI: Purchasing Managers' Manufacturing Index; PPI: Producer Price Index; SAAR: Seasonally
Adjusted Annual Rate
Equity Price Levels and Returns: All returns represent total return for stated period. Index: S&P 500; provided by: Standard & Poor’s. Index: Dow Jones Industrial 30 (The Dow Jones is a price-weighted index composing of 30 widely-traded blue chip stocks.) ; provided by: S&P Dow Jones Indices LLC. Index: Russell 2000; provided by: Russell Investments. Index: Russell 1000 Growth; provided by: Russell Investments. Index: Russell 1000 Value; provided by: Russell Investments. Index: MSCI – EAFE; provided by: MSCI – gross official pricing. Index: MSCI – EM; provided by: MSCI – gross official pricing. Index: Nasdaq Composite; provided by: NASDAQ OMX Group.
MSCI EAFE is a Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East.
Bond Returns: All returns represent total return. Index: Bloomberg US Aggregate; provided by: Bloomberg Capital. Index: Bloomberg Investment Grade Credit; provided by: Bloomberg Capital. Index: Bloomberg Municipal Bond 10 Yr; provided by: Blomberg Capital. Index: Bloomberg Capital High Yield Index; provided by: Bloomberg Capital.
Key Interest Rates: 2 Year Treasury, FactSet; 10 Year Treasury, FactSet; 30 Year Treasury, FactSet; 10 Year German Bund, FactSet. 3 Month LIBOR, British Bankers’ Association; 3 Month EURIBOR, European Banking Federation; 6 Month CD, Federal Reserve; 30 Year Mortgage, Mortgage Bankers Association (MBA); Prime Rate: Federal Reserve.
Commodities: Gold, FactSet; Crude Oil (WTI), FactSet; Gasoline, FactSet; Natural Gas, FactSet; Silver, FactSet; Copper, FactSet; Corn, FactSet. Bloomberg Commodity Index (BBG Idx), Bloomberg Finance L.P.
Currency: Dollar per Pound, FactSet; Dollar per Euro, FactSet; Yen per Dollar, FactSet.
S&P Index Characteristics: Dividend yield provided by FactSet Pricing database. Fwd. P/E is a bottom-up weighted harmonic average using First Call Mean estimates for the "Next 12 Months" (NTM) period. Market cap is a bottom-up weighted average based on share information from Compustat and price information from FactSet's Pricing database as provided by Standard & Poor's.
MSCI Index Characteristics: Dividend yield provided by FactSet Pricing database. Fwd. P/E is a bottom-up weighted harmonic average for the "Next 12 Months" (NTM) period. Market cap is a bottom up weighted average based on share information from MSCI and Price
information from FactSet's Pricing database as provided by MSCI. Russell 1000 Value Index,
information from FactSet's Pricing database as provided by MSCI. Russell 1000 Value Index,
Russell 1000 Growth Index, and Russell 2000 Index Characteristics: Trailing P/E is provided directly by Russell. Fwd. P/E is a bottom-up weighted harmonic average using First Call Mean estimates for the "Next 12 Months" (NTM) period. Market cap is a bottom-up weighted average based on share information from Compustat and price information from FactSet's Pricing database as provided by Russell.
Sector Returns: Sectors are based on the GICS methodology. Return data are calculated by FactSet using constituents and weights as provided by Standard & Poor’s. Returns are cumulative total return for stated period, including reinvestment of dividends.
Style Returns: Style box returns based on Russell Indexes with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for stated period including the reinvestment of dividends. The Index used from L to R,
top to bottomare: Russell 1000 Value Index (Measures the performance of those Russell 1000 companies with lower price-to book ratios and lower forecasted growth values), S&P 500 Index (Index represents the 500 Large Cap portion of the stockmarket, and
is comprised of 500 stocks as selected by the S&P Index Committee), Russell 1000 Growth Index (Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values), Russell Mid Cap Value Index (Measures
the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values), Russell Mid Cap Index (The Russell Midcap Index includes the smallest 800 securities in the Russell 1000), Russell Mid Cap Growth Index (Measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values), Russell 2000 Value Index (Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 2000 Index (The Russell 2000 includes the smallest 2000 securities in the Russell 3000), Russell 2000 Growth Index (Measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher forecasted growth values).
Past performance does not guarantee future results.
Diversification does not guarantee investment returns and does not eliminate the risk of loss.
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial
instrument. The views and strategies described may not be appropriate for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the program explores the implications of current economic data and changing market conditions.
instrument. The views and strategies described may not be appropriate for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the program explores the implications of current economic data and changing market conditions.
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