Sometimes I am asked, “When is too early to start preparing for retirement?”

The answer is: it is never too early.

Many Americans do not save enough to have the type of retirement they dream about. Baby Boomers are the first generation in modern times that are responsible for their own success.

The last several generations retired at age 65, got a pension from their company, started Social Security and Medicare. Today, unless the employee works for a large company or government unit, they often do not receive a pension. People born after 1960 do not reach full retirement age until they turn 67. Retirement is much more complicated today.

Many people approach retirement with a large amount of debt. Sometimes it is from a mortgage or loan for a large home improvement project. Other times it may be from student loans from their children. Unfortunately, sometimes it is from carrying a balance on credit cards. Interest rates can be 18% to 20%. This is almost like legalized loan sharks.

While many people have not saved as much as would be ideal, often their saving are concentrated in only one saving funnel. There are three types of funnels according to the IRS. Qualified, non-qualified and Roth. Each has a different tax treatment.

Qualified money is tax deferred. It might be an IRA, 401(k), 403(b) or deferred comp. When you contributed the money, you got a tax deduction and the balance has been growing tax deferred. Once you reach age 70½, you must begin taking required minimum distributions.

Non-qualified money can come from a number of sources. It can be money left over from your paycheck after paying your bill. It also might be a gift, inheritance, received as the beneficiary of a life insurance policy or sale of property. Uncle Sam is not your partner. You only owe taxes on the gains and not the whole amount as on your qualified funds. There are no required minimum distributions.

The third funnel is a Roth or other tax advantaged plans such as HSA, 529 or certain cash value life insurance contracts. You do not get a tax deduction all the time when you deposit, but you do not pay taxes on the gain if done properly. For a Roth, the two requirements are you must be 59 ½ and have owned a Roth for at least five years. You can always pull your contributions from a Roth tax free, but not the gain.

Ideally, all three buckets will be about the same value. Unfortunately, many people have most of their savings in the qualified funnel. This is because it is easier to save there because of automatic withdrawals from your paycheck, and we often get a company match for some of the contribution. Most people would rather pay taxes later than sooner. Remember this money grows tax deferred.

While these are all great reasons, if you end up with all of your savings in qualified money when you retire, it can create a tax time bomb. You are required to start making withdrawals by age 70½. If these withdrawals are too big, it can push you into a higher tax bracket and cause more of your SS to be taxed. It can also increase your Medicare premiums. This situation become must more expensive upon the death of a spouse.

It is much better having saved a large balance than not, but it is even better to have your funnels more evenly distributed. Remember, all money is not taxed the same.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to

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