To Maximize Income Later, Now Is the Time to Plan Tax Strategy

· Check out a Roth IRA. Once you're getting the full match in your 401(k), you have come to the first decision point.

Your can put more into the k-plan -- up to $15,500 this year, plus an additional "catch-up" contribution of up to $5,000 if you're age 50 or over -- and it will all go untaxed until retirement. But in retirement, it will be added to other income you have and taxed in whatever bracket that works out to.

This has led some advisers to suggest that if you have maxed out the match with your 401(k), you should consider funding a Roth IRA, if you are eligible to do so. These accounts are funded with after-tax money and thus do not reduce your current taxes. But withdrawals in retirement are tax-free.

To be sure, economists will tell you that in the long run the value of tax deferral today is exactly the same as the value of tax-free tomorrow, assuming that you're in the same tax bracket now and later. But if you are young and just starting out, you may in a lower bracket now than in retirement -- or tax rates in the future may be higher than they are now. Either way, money in a Roth account is protected.

Further, unlike a traditional IRA or 401(k), there are no mandatory withdrawals from a Roth. Thus, if the money is not needed, you can leave it there to grow tax-free, and perhaps bequeath it to an heir to create a tax-free lifetime stream of income for him or her.

But there are important drawbacks: Roth IRAs are available only to workers whose income is below certain levels, and the amount you can contribute is limited. Taxpayers may contribute no more than $5,000 ($6,000 if age 50 or over), and that only if their income is less than $159,000 for a married couple or less than $101,000 for a single. Above those limits, the amount you can contribute phases out, reaching zero at income of $169,000 for a couple and $116,000 for a single.

· Capital gains for the long term. Generally, it has been the government's policy to tax capital gains -- profits on the sale of assets such as stock -- at lower rates than wages, interest or other types of income. Also, as long as any profits remain on paper -- that is, until the asset is sold -- no tax is levied.

These features make stocks an appealing component of a retirement nest egg. Stock owners can defer taxes to a certain extent simply by not selling, and they will pay lower taxes when they do sell. (Keep in mind, however, that experts caution against holding something that ought to be sold simply because of taxes.) In addition, under current law, most dividends qualify for lower tax rates, too.

At and in Retirement

· Required beginning date. For holders of tax-deferred accounts, 70 1/2 is a key age. That is the age at which you must begin taking distributions from your account(s). The amount is based on the total value of all your deferred accounts and your life expectancy -- and that of your spouse if you have one -- as laid out in tables by the Internal Revenue Service.

This has been simplified in recent years, but some account holders still miss the date and are subject to stiff penalties, so as you approach that age, be alert. In fact, you actually have until April 1 of the year after the year in which you turn 70 1/2 to take your first distribution, but many experts advise taking that first distribution in the year you turn 70 1/2 rather than waiting. That is because if you wait, you have to take two distributions in the same year, which could raise your taxes. Make sure you include all your IRA and 401(k) accounts; you don't have to take the distribution from any particular one, but you have to get the overall percentage right. Consult an accountant or other expert if you are uncertain.