The Economic Value of Tax Planning
You've learned about safety, liquidity, and growth, but the wild card that can drastically effect your financial future is TAXES. You must understand the fact that there are three ways that most retirement accounts will be treated for tax purposes: TAX-DEDUCTIBLE, TAX-DEFERRED, or TAX-FREE. If an account is tax-deductible, it will normally be tax-deferred, but it will NEVER be tax-free. On the other hand, an account may be tax-free and tax-deferred, but will NEVER be tax-deductible. You can't ever receive all three in the same program. Understand the rules and build your plan accordingly to give you the maximum benefit. Know the difference between structures such as traditional & Roth IRA's. Take advantage of 401k plans with matching funds. Understand annuities, variable programs, and the difference between tax deductions & tax credits.
As always DIVERSIFICATION is the key, however, in this case we refer to TAX DIVERSIFICATION. Your emergency funds should always be in a taxable liquid account. Your retirement funds should not only be diversified between fixed income and equities, but also between qualified accounts (tax deductible and tax deferred, but fully taxable when withdrawn) and accounts which offer tax-free withdrawal at retirement, such as a ROTH IRA.
Make sure you read the special Retirement Tips page and discover the dirty little secrets about your retirement accounts.