Your Options For Tax-Deferred Retirement Investing

by: David Crosetti

In a recent article at SA, one of my favorite authors, Intelligent Speculator, posed the question, "Is Obama Trying To Kill Dividend Investing?"

Now before everyone starts getting all in a political uproar, I want to say, that it is not my intention to bash President Obama. The author is asking a number of significant questions and they are thought provoking to say the least. This is not, again, an article intended to slam the President. Instead it is an article that will hopefully give you useful advice about dividend Investing and how you can best practice the strategy, regardless of which party is in office or which way the winds of politics decided to blow.

What I Know:

There is little or no doubt in my mind that the best way to invest in the stock market, whether you are a capital gains investor or you are a dividend investor, is through tax-deferred investment options.

The 401(k) Investment

Current IRS contribution limits to a 401k are $17,000 for 2012. If you are over 50, you can contribute an additional $5,500. That's a total of $22,500 that can be excluded from income taxes this year.

At work, the 401(k) and its other versions, relative to the type of employment that you have, is a great place to start investing. For many people, the options they have within their 401(k) are very good. For others, they might have, at best, average investing opportunities. Regardless, the 401(k) allows you to shelter income, tax-deferred and often with company matching dollars. It doesn't get much better than that.

The other advantage is that some 401(k) programs will allow you to transfer dollars from the 401(k) to a self-directed IRA account. Seeking advice from a competent CPA would be advisable in any case, and I would recommend you do just that.

The Traditional IRA

Another vehicle to use is the Traditional IRA. Many older investors began those Traditional IRAs at some time in the past. Like the 401(k), the IRA allows you to take a deduction for income that is put into the IRA and at the same time, any growth in the portfolio will accumulate free of tax consequences until you begin withdrawing the money from the IRA. At that point, the monies received will be taxed as "ordinary income."

An advantage to the Traditional as well as the Roth IRA is that as an individual investor, you can operate with your own particular investing strategy, buy and sell stocks with no tax consequences with the trade, and reinvest dividends with no need for tax reporting,

The Roth IRA

The Roth IRA is another option. This vehicle operates without the immediacy of income shelter. You cannot deduct the amount invested in the Roth. However, like the Traditional IRA, the monies invested in the Roth will grow without tax consequences for capital gains and dividends received, and best of all, under current regulations, money withdrawn from the Roth will not be taxed at all.

Another advantage of the Roth is that unlike the Traditional IRA, there is no requirement for you to ever take distributions from it and the Roth can be passed generationally, without any tax liabilities moving forward.

What Concerns Me:

There have been numerous articles about dividend tax rate being changed at some time in the future. I don't have a crystal ball, and I can't really say definitively that taxes will change or they won't.

But, rather than get overly concerned about the "possibility" of any tax changes to retirement programs or any structural changes, I would rather focus on funding my retirement accounts as aggressively as I am able, for as long as I am able, up to and until any changes are made in those investment account rules.

I don't have time to worry about it. That's why I have Chris, the CPA. That's his job to worry about it and to advise me as to what I need to do moving forward, why I need to do it, and how best to do it. Any worry or speculation takes away the intensity level of my being focused on growing my portfolio and my income, and I choose not to be distracted by things I cannot control.

What concerns me the most is that so many of you are spending way too much time speculating and worrying. Never lose sight of what you are trying to do with your portfolio -- for me that is increasing my income stream and at the same time securing my retirement years. Each of us needs to identify what we are trying to accomplish as investors.

Always remember that in the "game" of investing for the future, rules can and will change. However, with a good CPA handling your financial strategies, knowing the rules changes can often be valuable to know, as you adjust your strategies to remain in compliance with the rules.

What the Future Holds:

No one can say with any certainty that the Bush tax cuts will be renewed. They may be, they may not be. I haven't a clue. No one can say that Congress is not going to attempt to raise taxes on dividends, capital gains or interest earned. No one can say that there will be fundamental changes in the 401(k), Traditional or Roth IRA programs. It's all speculation.

Regardless of changes to our system of taxation, as an investor I need to continue to use the tax laws, as they exist today, to invest my money. I do not intend, nor have I ever invested exclusively in the stock market. There are many other places to invest, such as rental real estate, collectibles, business opportunities that might present themselves, but for the purpose of this article, we will remain focused on stock investing.

My course of action is to continue what I have been doing without worrying about things that I cannot control. Based on what is, I have developed a fairly sound investment program and I will continue to manage that program as we move forward.

What You Need To Do:

For the younger investor, fund your 401(k) at work. Your investment options may be limited, but you have a regular investment strategy that goes on paycheck after paycheck. Profit sharing and company matching funds are "bonus" money. Invest in the best selection of options that you have and never look back. Monitor that investment option every quarter when you get your statement. Track your individual contributions relative to the value of the portfolio.

If a 401(k) option is not available to you, then seriously look at the Roth. I think that as long as the rules for the Roth remain in place, it is the best investment vehicle for younger investors for many reasons. While there is no initial tax deferral, the long-term tax avoidance is too important a factor to not consider the Roth.

The Traditional IRA is what many older investors hold. It is a good investment option as dollars going in are given tax advantages with the reduction of income. Like the Roth, you are free to exercise any investment strategy you choose.


They say that "death and taxes" are inevitable. However, there are many ways to avoid, delay, or suspend tax consequences that a good CPA can share with you. It is wise to make the aquaintence of a CPA and keep the relationship a business one. It's nothing personal, but it's all about business.

Put together a strategy, today, based on the rules of the game right now. Make adjustments as you must when things change. There should be no misconceptions that things will remain the same "forever." They won't.

Disclosure: I am long KO, CL, KMB, T, VZ, PG, ITW, EMR.