Retirement Planning and Federal Income Taxation

Your financial planning practice services several sophisticated individuals who have accumulated a substantial amount of assets but who are naive concerning potential strategies to reduce taxes. To increase their awareness, one client suggested that you offer a complimentary seminar to explain fundamental means for reducing taxes. Your immediate reaction was that each individual's tax situation differs, so the seminar would be of little benefit. On further reflection, however, you thought a focused presentation could be beneficial, especially if you limit the discussion to one topic, retirement planning, and cover other tax strategies such as capital gains or estate planning only to the extent that they affect retirement planning.

To illustrate the differences in retirement planning, you selected two very different case studies. Mary Brost is a single parent with one teenage son. She has a well$-$paying, secure job that offers a $401(k)$ plan, life insurance, and other benefits. While Ms$.$ Brost has sufficient resources to finance her son's college education, he works in a local certified public accountant $($CPA$)$ office that provides him with sufficient spending money, including the cost of insurance for his car.

Jason Agens has two young children, and his wife has returned to graduate school to complete an advanced degree. He is self$-$employed in an industry with large cyclical swings in economic activity. Although Agens did not sustain any losses during the prior recession, he has previously experienced losses that have affected his willingness to assume risk. During the good years, he has accumulated a sizable amount of liquid assets that he believes may be needed during any future periods of economic downturn.

You decide that both individuals offer sufficient differences to cover many facets of tax planning for retirement. To ease your presentation, you assume that both are in the $22$ percent marginal tax bracket and that retirement will not occur for at least $20$ years. Although you would like to illustrate how much each individual could accumulate, you believe that discussion should be deferred until some other time in order to concentrate on the tax implications of possible retirement strategies. To help generate discussion, you decide to start your presentation by answering the following specific questions that you distributed prior to the seminar:

Can Mary set up an IRA and deduct the contribution from her income that is subject to federal income taxation? Does the same apply to Jason? Could Mary's or Jason's children have IRA accounts?

Can Mary or Jason set up a Keogh account and deduct the contribution from income that is subject to federal income taxation? Could their children establish Keogh accounts?

Is there any reason why Mary or Jason should prefer a $401(k)$ or Keogh retirement account to an IRA?

Is the income generated by Mary's $401(k)$ account subject to current federal income taxation? If Jason created a retirement account, would the income be subject to current federal income taxation?

If either Mary or Jason were to withdraw funds from their retirement accounts, would they pay federal income taxes and penalties?

If Mary or Jason purchased stock outside of a retirement account, should the purchases emphasize income or capital gains? Would purchasing stock outside a retirement account be a desirable strategy?

Would the purchase of an annuity offer tax benefits that are similar to a retirement account?

What general strategies would you suggest to an individual seeking to accumulate funds for retirement?