What do I need to know about how the Lifetime Planner uses tax-deferred savings information?

The Lifetime Planner uses tax-deferred savings(Tax-deferred savings are investments that postpone (but don't eliminate) taxes on earnings and sometimes contributions. Unlike taxable savings, the taxes on the interest, dividends, and any associated capital gains are postponed until you dip into the savings. You usually have restrictions on how much you can save, and you can't dip into the savings until you are 59 1/2 years old (or else you face significant taxes and tax penalties) information to estimate the amount you'll have in your tax-deferred plans when you retire. If you do not have sufficient savings, some of your retirement funds must come from other sources (such as Social Security, pensions, selling investments, and so on).

The Planner enforces the contribution limits for different tax-deferred accounts as they calculate your future savings. In most savings plans, the maximum contribution you can make is limited to a percentage of your salary or to a set dollar amount. The Planner does not reduce your yearly taxable income by your tax-deferred savings. Your average income tax rate(The income tax you paid over a period divided by your gross income over the same period. It is different from your "income tax rate" because it is an average taken over several years. The average income tax rate is sometimes called your "effective tax rate") should reflect the tax reduction.

Partly tax-deferred savings plans

With a partly tax-deferred plan, you invest with money you have already paid taxes on, but the investment gains you accumulate are tax-deferred. A common partly tax-deferred plan is a commercial tax-deferred annuity, sold outside a pension plan.

Fully tax-deferred savings plans

With a fully tax-deferred plan, you don't pay income taxes on the money that you earn and save. Neither do you pay taxes on your investment gains until you withdraw the money from your plan.

Common fully tax-deferred savings plans are:

  • Individual Retirement Accounts (subject to income limits)
    An IRA (A personal tax-deferred retirement account that you can establish as an employed person. The money grows tax-deferred until it is taken out at retirement. The annual contributions may be tax-deductible, depending on specific IRS rules) is a personal tax-deferred retirement account that you can establish as an employed person.

    In the Lifetime Planner, the IRS allows you to contribute an additional $2,000 (above your $2,000 contribution) if your spouse does not work for pay. However, the Lifetime Planner does not allow an IRA contribution from an individual without an income.

    It is a federal ruling that you cannot contribute to an IRA beyond 70½ years of age. The Lifetime Planner automatically applies this limit.
  • SEPs
    A Simplified Employee Pension Plan (SEP-IRA) is a tax-deferred retirement plan that allows employers to contribute to IRAs for themselves and for their eligible employees.

    The Lifetime Planner has two types:

    • SEP for employees tax-deferred savings plan - A SEP for Employees (Simplified Employee Pension) plan is generally for individuals employed by small companies. It is either an employee-contributed SARSEP (Salary Reduction SEP) or an employer-paid SEP.
    • SEP for self-employed tax-deferred savings plan - A SEP for Self-employed (Simplified Employee Pension) is a profit-sharing savings plan for self-employed individuals. Currently, the SEP for Self-employed plan is for individuals who are their own employer. Employees of self-employed individuals should use the SEP for Employees.

    In the Lifetime Planner, if you are self-employed, since you are both employer and employee, your contribution is the only component of your SEP.

    Even though you plan to save a fixed dollar amount each year, your savings may decrease when your salary decreases. This is because you have a lower maximum contribution limit due to a lower salary. For example, a SEP-IRA limits total contributions to 15 percent of your salary.

  • Keogh plans
    Keogh plans (A tax-deferred savings plan self-employed individuals or partners (including a sole proprietor who files Schedule C or a partnership whose members file Schedule E). The account can be set up as a profit-sharing or money purchase plan. A Money Purchase Keogh plan requires a defined annual contribution. Contributions to a Profit Sharing Keogh plan are discretionary. Overall, your combined yearly contribution to both types of Keogh plan cannot exceed 25 percent of your adjusted self-employment earnings or $30,000 indexed by inflation in $5,000 increments. When contributions are expressed as a percent of the self-employment earning base they cannot exceed $170,000 (indexed by inflation in $10,000 increments) are tax-deferred savings plans for individuals who are either self-employed or self-employed partners. In the Lifetime Planner, even though you plan to save the maximum allowed of your self-employed income, your savings are always less than that amount. The reason is that the maximum percent applies to adjusted salary your self-employed income minus your contribution. For example, suppose you have $100,000 in self-employed income, and the maximum percent you can contribute to a Keogh plan is 25 percent. Then the most you can contribute is $20,000, which is 25 percent of $100,000, minus your $20,000 contribution.
  • 401(k)s and 403(b)s
    401(k)s (A tax-deferred employer-sponsored retirement investment account. Money is deducted from the employee's paycheck and usually reduces the employee's taxable income. The money you invest in your 401(k)/403(b) typically does not generate any taxable income as long as it remains in the 401(k) or 403(b). Taxes on investment gains are deferred until you withdraw money from the plan during your retirement. You can begin withdrawing from a tax-deferred investment account without penalty at age 59 1/2.) and 403(b)s (Tax-sheltered annuities (also called TSA plans). They are offered to employees of tax-exempt organizations and public schools that (with the exception of some grandfathered organizations) are not able to participate in section 401(k) plans. The income you save in these plans is not subject to federal income tax, most state income taxes, and most local income taxes until you withdraw it. You may withdraw qualifying distributions to help avoid immediate income tax or excise taxes, if applicable.) are retirement accounts arranged by your employer. In the Lifetime Planner, even though you plan to save a percentage of your salary, you may see your savings remain constant as your salary increases. This occurs when you have reached a maximum contribution limit, such as the $10,500 limit on your 401(k) contributions (indexed for inflation).
  • Tax-sheltered annuities that are part of company retirement plans
    A type of investment that guarantees payment of specific amounts at specific times, or a single lump sum payment. Also refers to a type of investment that creates an annuity. Annuities (An investment, often with an insurance company, that does not generate any taxable income as long as it is in the annuity. Fixed annuities guarantee a fixed rate of interest one year at a time (the rate varies from year to year). Variable annuities offer fluctuating interest. Annuities guarantee payment of specific amounts at specific times, or a single lump sum payment. The insurance company may be investing your money in real estate or bonds or stocks. See also Tax-deferred annuity.) are sponsored by insurance companies and other financial institutions and sold by agents, banks, savings and loans, stockbrokers and financial planners.

    In the Lifetime Planner, there are no contribution limits on a tax-deferred annuity; you may enter any dollar amount you like.

    The Lifetime Planner treats fixed annuities as assets. Variable annuities are treated as investments. This table shows you how to enter information for each type of annuity:

    Type Current Value (Principal) Future Premium Payments Future Income
    Flexible- premium variable annuity (TDA) Enter the annuity as a tax-deferred investment in Quicken. In the Investments section, enter the premium as a contribution. After retirement, the Planner automatically withdraws the principal in your tax-deferred annuity. They do that by reducing the overall value of your tax-deferred investments as needed to make withdrawals to pay for expenses.
    Single- premium variable annuity Same as above. N/A Same as above.
    Flexible- premium fixed annuity Enter it as an asset in Quicken. Enter the current principal as the current value of the asset. Include the asset in your plan via the Current Homes & Assets section. If the asset was purchased with after-tax dollars, enter the purchase price in the "How much did you pay" box. If it was purchased with pre-tax dollars, enter zero. Enter estimated appreciation in the "value increases by" box. Enter the premium payment as an expense in the Current Homes & Assets section. For a lump sum distribution, enter a sale date for the annuity in the Current Homes & Assets section For periodic income, enter the payments you expect to receive as income in the Current Homes & Assets section.
    Single- premium fixed annuity Same as above. N/A Same as above.


Sometimes, even though you entered future tax-deferred savings plans, your tax-deferred savings for the year are $0. This is due to one of two causes:

  • You don't have any salary income in that year. Your contributions to most plans are limited by your salary. For example, you can't make the full $2,000 contribution to an IRA unless you earn at least $2,000 in salary. You may have forgotten to enter a salary for that year or you are planning on not earning a salary, which means you can't make tax-deferred contributions.
  • You select the wrong employment status for your job. You can make Keogh plan or Self-Employed SEP contributions only when you have selected self-employed status. You can make 401(k), 403(b), or SEP for Employee contributions only when you select regular employee status.

Statutory limits may be changed at any time during the year. You and your financial advisor are responsible for staying current on tax laws and interpreting their impact on your personal situation.