PLANSPONSOR - February/March 2020 - 10

UPFRONT
Tax Considerations for Retirement Plans
qualified plans, " which, by saving people
the initial tax, can let them almost double
their earning ability going forward, he
says. He gives the example of someone
in a marginal tax rate of 50% contributing
$19,000 to a 401(k). " They would
have that full $19,000 working for them,
whereas in a nonqualified account, that
investment would be only $9,500. "
As for how gains on investments
inside a qualified plan are treated, like
contributions, they, too, are tax-deferred,
says Mark Astrinos, a member of the
American Institute of Certified Public
Accountants (AICPA) Personal Financial
Specialist Committee and a principal of
Libra Wealth. " For a tax-qualified account,
when an investment is sold at a gain, there
are no taxes due, " Astrinos says.
" This is because all income tax
is deferred in a tax-qualified account,
meaning you can sell investments at
substantial gains within the account and
pay no capital gains tax, " he continues. He
points to this as an advantage over standard
taxable accounts where the saver is
subject to capital gains taxes if an investment
is sold. " The deferral of capital gains
allows your account to grow much more
over time than if the taxes were taken out
each time an investment was sold. "
David Reyes, financial adviser and
AS APRIL 15 approaches, plan participants
may want clarification about how
their retirement savings are taxed. What
should plan sponsors make sure that
they know?
The most important tax consideration
about putting money " into a tax
qualified account is that they get to avoid
paying income tax on those deferrals, "
says John Vento, an adviser with Avantax
Wealth Management. " This puts a person
in the best position to accumulate wealth
in a tax-efficient manner. "
He explains: " If you invested
$100,000 in any type of account other
than a qualified plan, you would have to
first pay taxes on that money, whereas if
you defer the tax by investing the money
in a qualified retirement plan, you'll earn
gains on your investment, including
the money you didn't have to give to the
government. If I told you I could give you
an interest-free loan throughout your
working years and permit you to slowly pay
me back in your retirement years, you'd
jump at that opportunity. That's how I like
to explain the benefits of contributing to a
qualified retirement plan. It's a powerful
tool to help people accumulate wealth. "
Vento calls himself " a huge fan of
10 PLANSPONSOR.COM February - March 2020 Art by Jackie Ferrentino
chief financial architect at Reyes Financial
Architecture, says it is also important
for people to understand that " [qualified
defined contribution (DC) plans] are
illiquid investments. If you choose to take
your money out before age 59.5, you'll pay
ordinary income tax [on the money] plus
a 10% early withdrawal penalty-unless
the money is used for higher education or
medical bills. "
It is precisely because of the tax
deferrals in qualified accounts that
Comprehensive Wealth Management
advises retirees to first withdraw money
from their taxable accounts. -Lee Barney
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PLANSPONSOR - February/March 2020

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