A tax strategy to help your assets last longer


Mature couple meeting with their financial advisor and reviewing their financial plan.

Your retirement could last several decades. So it’s important to not let taxes diminish your savings more than necessary. Your financial advisor will review the tax treatments across your investment accounts during your working years. When you retire, they can also help you develop a sustainable withdrawal strategy with taxes in mind.

By diversifying your investments across tax treatments, you can:

  • Potentially fuel savings over time and help your assets last longer.
  • Gain flexibility in how you access retirement income in the future.
  • Take more control of your financial picture, now and in retirement.

 

Diversifying the taxability of retirement savings

Over a 30-year period (such as retirement), a planned approach for the tax treatment of your retirement assets could save you money in taxes. Tax diversification is a strategy that takes into consideration various tax treatments across the investment accounts you will eventually use for income after you stop working. Coupled with a tax-efficient withdrawal strategy, tax diversification could help your assets last longer in retirement. Taxation is just one consideration when making investment decisions. Here’s a refresher on the three tax treatment categories:

 

Tax-deferred

Taxable

Tax-free

  • Contributions made with pre-tax or post-tax dollars
  • Money grows tax deferred. Distributions are generally taxed at ordinary income rates.
  • Examples: 401(k),1, 2 403(b),1 457(b), traditional IRA,1 pension plans,1 annuities1
  • Contributions made with after-tax dollars
  • Taxable income, including capital gains when realized, interest when received or dividends when paid.3
  • Examples mutual funds, stocks, bonds, bank accounts4
  • Contributions made with after-tax dollars
  • Earnings can be tax free, provided certain conditions are met.
  • Examples: Roth IRA, 1,5 Roth 401(k),1,5 529 plan,6 municipal bonds,7 cash value life insurance8

Potential reasons to contribute:

You anticipate you will be in a lower tax bracket during retirement. Taxable distributions are generally taxed as ordinary income upon withdrawal.                                 

You want more flexibility for when you can withdraw your money and don’t want to consider required minimum distributions (RMDs).

You want to withdraw money in retirement without being pushed into a higher tax bracket.                                      

 

Keep more of your money

You work hard to save for retirement. The sooner you consider how and when your retirement assets are taxed, the more time you have to accrue the benefits. Because there isn’t a one-size-fits-all approach for tax diversification, your financial advisor will make personalized recommendations based on your financial goals, time horizon and tax situation. Contact your advisor today.