A tax strategy to help your assets last longer


Senior couple on a walk with ice cream cones

 

Key Points

  • Don’t let taxes diminish your savings more than necessary.
  • Addressing tax treatments now could help your assets last longer in retirement.
  • There is no one-size-fits-all approach for tax diversification — advice based on your personal financial goals is key.

Given retirement could last several decades, 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 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

What is tax diversification?

Tax diversification is a strategy that ensures there are different types of 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. Here’s a refresher on the three tax categories:

Tax-deferred
Taxable
Tax-free
  • Funded on a pre-tax basis
  • Money grows tax-deferred
  • Distributions are 100% taxed at ordinary income rates
  • Examples: 401(k), 403(b), 457(b), traditional IRA, pension plans, annuities
  • Funded on after-tax basis
  • Receive taxable dividend or interest payments as the money grows
  • Distributions are subject to capital gains taxes
  • Examples: mutual funds, brokerage, managed, banking
  • Funded on after-tax basis
  • Money grows tax-deferred
  • Distributions are tax free when conditions are met
  • Examples: Roth IRA, Roth 401(k), 529 plan, municipal bonds, cash value life insurance
Potential reasons to contribute:
You anticipate you will be in a lower tax bracket during retirement.                                  
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 address how and when your retirement assets are taxed, the more time you gain to accrue the benefits. Because there isn’t a one-size-fits-all approach for tax diversification, your advisor will make personalized recommendations based on your financial goals, time horizon and tax situation. Contact them today.