How tax diversification can fuel your savings goals

Key Points

  • Use smart tax strategies to keep more of the money you’ve earned.
  • A tax-diversified mix of assets can help provide tax efficiency now and in the future.
  • Work with your tax and financial advisors to develop a strategy that supports your goals.

Tax season is an opportune time for you and your financial advisor to review the tax treatment of your retirement assets. Strategically distributing your assets among three tax categories can help you keep more money in your pocket. 


This category includes:

  • 401(k)1,2, 403(b)1 and 457(b) defined contribution plans
  • Traditional IRAs1,3,4
  • Pension plans1
  • Deferred annuities1

The majority of U.S. retirement assets are held in tax-deferred employer plans, which offer the benefits of pre-tax contributions (lowering your annual taxable income) and tax-free growth to accumulate more savings for retirement.

Beginning at age 59 1/2, your withdrawals are taxed as ordinary income, but you won’t pay the 10% early withdrawal penalty.

While it’s wise to take advantage of available employer contributions and annual tax savings, funding your future exclusively with tax-deferred investments can result in a heavier tax burden in retirement.

This category includes:

  • Roth IRAs1,5
  • Municipal bonds/funds6
  • 529 savings plans7
  • Cash-value life insurance policies5,8

Consider some tax-free investments, especially if you expect to be in a higher tax bracket in retirement. You generally won’t pay taxes on withdrawals if certain requirements are met.

Because these investment vehicles aren’t subject to annual required minimum distributions, you can accumulate tax-free earnings for as long as you like.

This category includes:

  • Bank accounts9
  • Brokerage accounts
  • After-tax mutual funds

Taxable assets help support your cash management strategy. Accumulating one to three years of living expenses in liquid assets can help you ride out volatility in a down market without selling other investments at a loss.

While the earnings and sale of taxable assets are subject to current taxes, you may be able to receive preferential tax treatment on long-term capital gains and qualified dividends.

Watch our short video to learn more about how tax diversification can benefit you.

We can help

Meet with your tax and financial advisors to implement a tax-diversification strategy. Doing so could provide you with greater financial flexibility and control today and increase your income in retirement.