Retirement Plan Tax Allocation Strategies

Retirement Plan Tax Allocation – Tax Now, Tax Later, or Never Taxed

By Graham Wickham, CEO & President

If you’ve engaged a financial or investment advisor, at some point they’ve probably talked to you about investment allocation. But when was the last time someone talked to you about tax allocation and those accounts?

Tax planning for retirement is incredibly valuable in helping you maximize your retirement savings. By understanding the different types of retirement accounts and how tax allocations work, you can develop strategies that reduce your current taxable income, defer paying taxes until later years, or even take advantage of completely tax-free gains upon withdrawal in the future.

When it comes to taxes on your savings and investments, there are basically three primary buckets: taxed now, taxed later, and never taxed

So what do we mean by “taxed now?” Taxed now means that if you have a brokerage account with stocks, bonds, and mutual funds in it, it could generate various sorts of taxable events. This could be dividends from your investments or capital gains when you sell an asset at a profit. 

The “taxed later” bucket includes things like your 401k or individual retirement account (IRA). With these plans, you can choose to invest pre-tax dollars, which reduces your taxable income in the same year. This means you’ll pay less in taxes now and more when you withdraw from the account during retirement. However, once withdrawn from an IRA, all earnings are taxed as ordinary income at current rates, so it may be advantageous to defer tax liabilities into future years, if possible. Another “taxed later” plan is a pension, which is taxed as you draw money from it in your retirement.

Finally, there are a couple of things that are never taxed. One is life insurance, which can build up substantial cash value. Distributions from a life insurance policy are never taxed. Additionally, distributions from a Roth IRA aren’t taxed if you’ve held the IRA for five years from the first contribution and you’re over 59 ½ (since you already paid taxes on that money before you placed it in the IRA). 

Overall, careful planning and consideration of various factors like retirement goals, income bracket and timelines can make all the difference when creating your long-term financial plan – helping you save money now while still keeping an eye towards achieving your future objectives. Just don’t forget about taxes and how they impact how much money ends up in your pocket at the end of the day.

Want to learn more about maximizing your future retirement income by making smart decisions today? Get in touch and we’d be happy to help!

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