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- "MY TWO CENTS"
- Primary Home vs. Diversified Portfolio
- Investor Behavior Part 1
- Investor Behavior Part 2
- Life Insurance: How much should I have?
- It's not what you make, it's what you keep
- Is Your Cash Still Earning Zero?
It's not what you make, it's what you keepAlmost everybody I run into is concerned with their investment returns, yet few pay attention to how taxes may affect those returns. If you are a good saver, experience decent returns and build up a nice retirement portfolio, you run the risk of falling into a high tax bracket during retirement. This is especially true if you plan to live off of a generous income stream from that portfolio. Having been a hard worker and good saver, wouldn’t you want to keep as much of your savings and investment gains as possible? Similar to the well-known strategy of asset diversification1, which may reduce return risk, the lesser known strategy of tax diversification may help to reduce tax risk. Establishing a tax diversified strategy means having different investment buckets with different tax treatments. Let’s review three different types of investment tax treatment along with some well-known examples of each: 1) Taxable –1099 NOW- (i.e. Savings, CDs, real estate, business income, and non-retirement investment accounts) *Please note, you cannot have all three in any 1 account, however, by establishing multiple savings vehicles you can incorporate all three into your overall retirement plan Although the third one may catch the eye at first, the reality is that some mixture of all three is usually best. A mixture can give you the opportunity to lower taxes both before and after retirement. This strategy can lower your annual effective tax rate and help you keep more money in your pocket. So, you may be wondering, “what is the right mixture?” Well, like most financial strategies, this will be different for different people and will depend on many factors, such as your adjusted gross income, life stage, and the retirement vehicles available to you. Let’s now take a look at the potential impact of tax diversification in a hypothetical example: ![]() As you can see from this example, tax diversification can help you better manage your tax liability in retirement, allowing you to keep more of your retirement savings. The future is unknown, but here are some factors to consider when thinking about taxes in retirement: 1) While uncommon, your tax bracket could actually be worse in retirement than it is now. Given these factors and the unknowns of future taxes, tax diversification may prove prudent. Investments with different tax treatment can increase your flexibility to handle various tax outcomes. Strategic withdrawals from the different investment buckets can also help to reduce tax risk and help you keep more of your hard earned money.
1Asset Allocation does not ensure a profit or protect against a loss, but is intended to help manage your goals and risk tolerance. The information provided is general, educational and not intended as an offering of any specific products or services, nor considered as specific investment, legal or tax advice. Individual situations can vary, and an individual assessment to your specific situation should be used.
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