Expert Interview: Taxes and Saving for Retirement

Audrey M. Jones
Rick Rodgers in Suit
Retirement Counselor Rick Rodgers

At first glance, taxes and saving for retirement seem to have little to do with each other. After all, you spend money paying taxes, but reserve it for retirement. Yet, according to Rick Rodgers, a retirement counselor and the author of "The New Three-Legged Stool: A Tax Efficient Approach to Retirement Planning," tax time provides the perfect chance for individuals to analyze their retirement savings plan. LovetoKnow interviewed Rodgers to obtain a better understanding of how paying taxes and the provisions of the Internal Revenue Code can assist everyone in preparing for retirement.

Using Saving Devices for Taxes

LoveToKnow (LTK): Should taxpayers max out their 401(K) each year? Why or why Not?

Rick Rodgers (RR): Generally, taxpayers should contribute whatever their employer will match. Beyond that, they should contribute only the amount that would be taxed in the 25 percent tax bracket. Taxpayers in the 15 percent bracket should make Roth IRA contributions.

LTK: Should everyone establish a health savings account (HSA? Are there any factors that determine whether a HSA might be helpful or necessary?

RR: HSAs are mainly appropriate for people that are usually healthy. The great advantage of an HSA is its doubling as a backup retirement account. Contributions that are not spent for medical accumulate until retirement and can then be withdrawn to supplement your retirement income.

LTK: Is it better to have a HSA because it is tax-free, even if you do not think that you'll use the deposited money, or is it better to save those funds? Should you invest them?

RR: The tax deduction of the HSA is a big advantage, but it is also important to have after-tax savings as well. You need to find a balance. You don't want all of your savings going into an HSA, leaving you without an emergency fund.

LTK: What is the reasoning behind your recommending a ROTH IRA rather than a traditional IRA?

RR: The breakeven point for a Roth IRA vs. Traditional IRA is eight years. Contributions that remain in a retirement account for longer than eight years are more beneficial in a Roth, assuming that your investment returns are equal and tax bracket doesn't change.

Tax Planning Basics

LTK: Several experts are vocal about their belief that taxpayers should never receive a refund, mainly because it indicates that the taxpayer overpaid and did not have the money they earned to invest or save. Do you feel the same way? Why or why not?

RR: Ideally everyone should be budgeting and saving money from every paycheck. Not using the payroll tax system to force savings.

LTK: What are the minimum or maximum withholding limits you suggest a taxpayer request? Is there any way to predict whether previously requested limits are no longer suitable?

RR: The best way to be sure that your withholding is correct is to estimate your tax liability. You can do this for free online through Turbo Tax. Check your estimate mid-year with your year-to-date information on your check stub. Don't forget to include any significant tax events that may have happened or will happen. For complex situations, consult a tax advisor.

LTK: Is there anything in particular you would advise single parent, heads-of-households about saving tax dollars for retirement?

RR: The advice is the same. Watch your tax bracket. Save in a Roth IRA unless you are going to be in a 25% or higher tax bracket.

Learning to Save for Retirement

LTK: Do you have any advice for individuals who have trouble saving and might be worried that, if they reduce their withholding, they will not deposit that money into a savings or investment account? What other options might these individuals have so that they actually save their tax refunds for retirement?

RR: First - live on a budget. Don't change your withholding until you have a written budget and have been living on it for at least 3 months. Second - set up an automatic deposit with a mutual fund for the amount you want to save. The fund will automatically pull a predetermined amount of money out of your bank account on the same day each month.

LTK: Are there any retirement savings guidance programs or books you would recommend to help a taxpayer identify just how much they should save each month?

RR: Kiplinger has accumulated a great source of financial resources and tools for calculating savings and goals. They are categorized by topic.

LTK: What is the most unbelievable excuse you've heard about why an individual cannot save for retirement and what was - or would be - your response to it?

RR: The most common excuse is that "I have plenty of time to save for retirement." In fact, time is your biggest ally when saving for retirement and procrastination the biggest enemy. Small amounts of savings go a long way when you are young because of compound interest. You have to triple the amount of money you save each month for every decade you wait to accumulate the same amount of money.

LTK: Is there anything else concerning taxes or retirement that you would like to share with LoveToKnow's readers?

RR: Everyone's goal should be to reach financial independence. Each person starts out working for money to support themselves. Discipline your spending so that you save something from every paycheck. Make it your goal to increase those savings every year.

The goal is to accumulate enough wealth that you no longer have to work for money. Now, your money is working for you. Most people overspend and end up late in life with very little savings. I want to encourage your readers to decide they are not going to end up in that position and to save and invest regularly to reach financial independence early in life.

Coordinate Retirement and Tax Planning Efforts

With Rodgers guidance, combining taxes and saving for retirement is not a difficult task. In fact, over time the two might become inseparable. This does not mean, however, that saving for retirement should only be considered every April. Instead, work to integrate saving for your future into your monthly budget. It's quite likely that you'll watch your nest egg grow as your tax liability decreases.

Expert Interview: Taxes and Saving for Retirement