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Tax Diversification: Smart Ways to tap into savings during retirement

| May 18, 2016
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Tax Diversification

I recently read a WSJ article titled, “The Smart Way to Tap Accounts in Retirement”. The article laid out strategies to withdrawal money in retirement that can make your nest egg last longer. The main way this was accomplished was limiting your tax burden. To limit your tax burden in retirement, you need to have accumulated money in different tax environments. This is referred to as Tax Diversification. 

Tax Diversification is the strategy of spreading your assets across different types of accounts – with the goal of paying the least amount of money to Uncle Sam. In my podcast, I explain how to implement a Tax Diversification Strategy.

For example, your 401(k) plan is a form of a Tax-Deferred Account. Your money is contributed into your 401k account on a pre-tax basis –the taxes on your money are deferred until you start withdrawing them in retirement.

When you start taking withdrawals from your Traditional IRA/401(k), these withdraws are taxed as ordinary income, which means that money is taxed like a paycheck. In retirement, you may already have other income sources that are going to be taxed in this fashion such as a pension, or some of your Social Security payments. What if all of your savings are in a retirement account like a 401(k) with taxes in the future? You may not be in a very good position to control how much you are going to pay in income taxes.

A way to implement a Tax Diversification Strategy would be to invest money in additional accounts like a Roth IRA which is a Tax-Free Account.

Also, you could invest in a brokerage account which is considered a taxable account. However, gains on your investments in these accounts are taxed at Capital Gains Rate and Long Term Capital Gains are taxed at a much lower rate today than money withdrawn from a retirement account like a 401(k).

A long term benefit of Tax Diversification 

Who knows how taxes will change over time and they will change, and then change again. Investing in different tax environments puts you in a good position to get the cash flow you need from your investments in retirement while being in more control of how much you pay to Uncle Sam. Pay him the least amount possible.

That can definitely help your nest egg last longer.

 If you’d like help setting up your tax diversification strategy for your retirement plan, please contact Casey Boland via email [email protected] or 513-598-5120.

Date Posted: 05/18/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 28 states, and we’d love to help. 

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