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Building Tax Diversification Strategies in Retirement

Saving for retirement is one of the most common financial goals for clients. The tax ramifications of your savings can impact your retirement and future tax laws are unknown. That’s why I believe it’s a good idea to fill all the different tax buckets to provide flexibility in your future decisions.

There are three main tax buckets or ways to save.

1) Tax-deferred bucket: Contributions to this bucket go in pre-tax and distributions are not taxed until withdrawn. For most of the tax-deferred accounts, there is a penalty to access this money prior to reaching age 59.5. The penalty includes paying income tax and a 10% early withdrawal penalty on top of that. Given current tax laws, there are required distributions from these accounts starting at age 73 as well. Examples of tax-deferred accounts are 401(k)s, 403(b)s, and traditional IRAs.

2) Tax-Free bucket: This bucket consists of funds that have been contributed with after-tax dollars and earnings are generally tax-free provided certain conditions are met. Examples of tax-free accounts are Roth 401(k), and Roth IRA.

3) Taxable bucket: This bucket consists of after-tax dollars. This differs from the tax-deferred and tax-free buckets because there is no tax-shelter included with this account. Earnings are taxed in the year they are received. Examples of taxable accounts are checking accounts, savings accounts, and non-qualified brokerage accounts. In my opinion, the non-qualified brokerage account is the most widely underutilized account.

In summary, utilizing all three of these tax buckets can benefit you by giving you control of your distributions, provide flexibility as life changes, and can help make your assets last longer.

Together, we can work to keep you on-track towards your financial goals. Request a consultation with me to learn more.

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