Retirement planning can help high earners avoid big tax hit

Personal finance retirement financial planning
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Big tax changes this year will force many top earners to pay closer attention to the tax treatment of their investments, including retirement accounts.

New Jersey attorney Doug Bramley usually gets a tax refund each spring, but he won't this year—or in the future—at least he's stopped counting on it.

"That's no longer going to happen. As my tax burden increases, I'm paying more and more in taxes and I'm not getting tax refunds and we have to plan financially for that," said Bramley, 40, who is married with two children.

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Top earners like Bramley will take a big tax hit this year on earned and investment income. For couples with incomes of more than $450,000—or $400,000 if you're single—increases in federal income tax and Medicare surtax will result in a total tax hit of nearly 42 percent on earned income in 2013—a more than 5 percent increase over last year.

Add to that taxes on dividends and long-term capital gains now at nearly 24 percent for top earners—an almost 9 percent increase compared to 2012, and tax on interest income in 2013, which is now at a whopping 43 percent. Facing a potential tax hit like this is forcing households like Bramley's to make some changes.

Payroll tax changes have also reduced take-home pay for millions of Americans. "We have already done a lot of planning as a family in anticipation of the fact that my income will be a little lower because of these tax bites. We've made the decision not to move," said Bramley, who had been planning to relocate his family to a larger home until he reviewed his tax situation.

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Big changes are ahead for portfolio planning, too. Financial advisors say recent tax increases give new urgency to the need for diversification, and they recommend new strategies for investing.

First, buy some stocks for growth "that aren't paying dividends that maybe give you the same result in the end, but have a little less tax implications," said Doug Lockwood, a certified financial planner and principal of the Harbor Lights Financial Group in Manasquan, N.J. Then, "make sure that after you look at your nonqualified money you go to your tax-deductible money—your 401(k)s, 403bs, your IRAs—and make sure that you're absolutely maximizing those opportunities."

So where should you put your retirement dollars to avoid a big tax hit? Lockwood and other financial advisors suggest:

  • Contribute the maximum amount to a 401(k) or employer-sponsored plan—up to $17,500 this year or $23,000 if you're 50 or older— to reduce your taxable income.
  • Convert a regular IRA to a Roth IRA. You'll be taxed on the money you convert, but you can generally take the money out tax free in retirement, after age 59½ as long as you've held the account for five years.
  • You can still keep a taxable account in the mix. Although putting more dollars there may be less attractive now.

"We're going to get back to really managing investments (thinking of) what the tax liabilities might be," Lockwood said. "And those folks who manage it the best will get to the finish line first."

For many, a varied investment strategy for an uncertain tax landscape is an imperative.

_By CNBC's Sharon Epperson. Follow her on Twitter @sharon_epperson.