Taxes and retirement — how 2013 tax changes affect your IRA investing

Taxes and retirement are two phrases that no one wants to see next to each other. But it’s more dangerous to ignore the truth than it is to face it, particularly as a new year begins. As 2013 gets underway, the U.S. Congress is still struggling to come up with a long-term solution to the nation’s tax and revenue problems. Regardless of your political affiliation, it’s important to stay up-to-date with these changes as they occur, as they might impact how you choose to invest within your individual retirement account.

Deductions. One of the ways that taxes and retirement could impact your life this year is through a proposed reduction to the availability of certain tax deductions. Basically, it would cap the overall dollar total that an individual could claim in deductions each year, or perhaps it would eliminate certain deductions altogether. These could change certain investment classes’ desirability.

For example, if the home mortgage interest deduction were to be reduced, many observers believe that the real estate markets would suffer. By effectively increasing the cost of borrowing for a home, people would be able to afford less, and this would result in a downward pressure on home prices. Individuals who use their self-directed IRAs to invest in real estate would be well advised to take these pressures into account.

Investment income. Another potential taxes and retirement change includes future changes to the tax code. This may include changes to the tax rates that are applicable to different types of investments. In particular, the preferential rates that are now applicable to capital gains and dividend income may change to become closer to (or perhaps even equal to) normal income tax rates.

Because income and capital gains accrue in IRAs on a tax-deferred basis (and on a tax-free basis for IRAs structured as Roth accounts), many investors try to keep heavily taxed investments in their IRAs. Meanwhile, they use their non-retirement investment accounts for investments, such as municipal bonds, that already have built-in tax advantages.

By the same token, if the rules on the taxability of an asset class such as municipal bonds were to change, then there might be a similar shift in how you allocate different types of investments between your IRA and your non-retirement accounts.

Tax rates that don’t increase now. Regardless of what decisions regarding taxes and retirement Washington makes in the coming months, you should also continue looking ahead to anticipate what changes might be likely to happen. Tax and revenue deals that simply delay the tough decisions should not necessarily be used as the sole basis for your long-term investment planning decisions. To make the best decisions, you’ll also need to look ahead to what changes you believe are likely to occur in the near future.

Changes to IRA rules. One final taxes and retirement potential scenario involves changes to IRA rules. It’s clear that any changes to the tax rules governing IRAs themselves could significantly impact how you use your account. Raising the contribution limits, changing the tax deductibility of current year contributions (in the case of a traditional IRA) or changing the rules governing withdrawals from your account could each make particular asset classes more or less advantageous.

Choosing an IRA custodian such as Quest Trust Company, with the wealth of informational resources and updates on its website, can help you make the best decisions for your own account.

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Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.