First Person: Factoring Taxes Into Retirement Planning

 K. W. Callahan for Yahoo Finance writes:  Planning is a pertinent part of many aspects of my life…as are taxes. As a self-employed individual, I'm responsible for handling much of my own income tax preparations. I do our family taxes each year. I budget for paying our home's property taxes. And when it comes to retirement, I tend to prefer to factor taxes into our planning now rather than deal with them later.

Retirement to me is more than just about saving money. It's about understanding that money and knowing how it's working and what can affect it over time and when it comes time for me to draw upon that money. And taxes can make a significant impact upon how long my retirement savings will actually last me.

Accounting for Taxes Now Rather than Later

I'm sure that some people out there prefer to look at their retirement account balances as they stand, and if those accounts are Roth IRAs, that might work out pretty well for them. I on the other hand, have a regular IRA that was rolled over from an employer-sponsored 401(k), and this means that the money in that account is taxable when I start taking distributions on it. Therefore, my account total isn't really all mine -- part of it belongs to the government. Therefore, while I don't know what my future tax rates will be when I retire, I like to go ahead and factor a tax rate of at least 15 percent in now.

Why Figure Taxes Early?

I'm the kind of person who would rather hope for the best and plan for the worst, and in all honesty, I don't think factoring in a 15 percent tax rate into my retirement account is even planning for the worse -- I think that would be closer to 25 or 35 percent. However, I like to do this now to give myself a more accurate accounting of what I will really have come retirement time.

I wouldn't like showing up to my retirement years with $400,000 in my account -- and expecting all that money to be mine -- only to realize that after taxes that amount might really only be $340,000 or less. It could make a big difference in my asset draw down plan as well as my actual retirement age.

Examples of Figuring Future Tax

It's not just our retirement accounts in which I figure an estimated future tax, and how I figure that estimated tax could be different for different assets. For example, I already mentioned how I plan for the taxes on my IRA. However, for government savings bonds, my calculation would be completely different. Since I would have bought those bonds with post-tax money, I would only factor in taxes for the amount that I accumulated in interest over time.

For example, if I bought a $1,000 bond and accumulated $200 in interest over the years, I would only use my estimated tax rate on that $200 amount rather than the full $1,200 total. Doing this helps me keep my estimates as accurate as I can get them without over or underestimating by too much.