Tax Diversification Why is tax-diversification important? 1. Offers you more flexibility 2. Protect yourself from future tax law changes 3. Ability for strategic withdrawals for tax efficiency Not all money is taxed the same, therefore understanding the order of how money is taxed is crucial. Depending on the account, it falls into 1 of 3 buckets. Having money spread across all 3 is beneficial. Let’s look at the 3 different buckets: 1. Pre-tax 2. Tax-free or tax favored 3. Post-tax Let’s explore with a few examples:
1. Pre-tax accounts: Think traditional IRAs and 401(k)s · Funded with pre-tax money therefore may receive tax-deduction today · Money grows tax-deferred · Taxed upon withdrawal 2. Tax-free accounts: Think Roth IRAs and Roth 401(k)s · Funded with after-tax money · Money grows tax-free · Tax free withdrawals *if meet the age and holding period requirement* 3. Post-tax accounts: Think taxable brokerage account · Funded with after-tax money · Taxed while it grows due to interest and dividends o Taxes owed on dividends depends on if its ordinary dividends or qualified dividends · Taxed upon sell of your investments, if gain it is either a LTCG or STCG o LTCG = long-term capital gain, held for more than 12 months o STCG = short-term capital gain, held for less than 12 months What happens if you take a loss in a taxable account? I will discuss in more detail in a later post. It is not about avoiding taxes, but rather managing them wisely and minimizing not only your tax bill today, but also minimizing your lifetime tax bill. Every individual’s situation is unique, so consider consulting a financial advisor and tax advisor to help tailor a strategy for you.
Disclosure:
Retirement Planning Solutions, LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Retirement Planning Solutions, LLC by the SEC nor does it indicate that Retirement Planning Solutions, LLC has attained a particular level of skill or ability. This material prepared by Retirement Planning Solutions, LLC is for informational purposes only and is accurate as of the date it was prepared. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Advisory services are only offered to clients or prospective clients where Retirement Planning Solutions, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Retirement Planning Solutions, LLC unless a client service agreement is in place. This material is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Retirement Planning Solutions, LLC is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.
Why is tax-diversification important?
1. Offers you more flexibility
2. Protect yourself from future tax law changes
3. Ability for strategic withdrawals for tax efficiency
Not all money is taxed the same, therefore understanding the order of how money is taxed is crucial.
Depending on the account, it falls into 1 of 3 buckets. Having money spread across all 3 is beneficial.
Let’s look at the 3 different buckets:
1. Pre-tax
2. Tax-free or tax favored
3. Post-tax
Let’s explore with a few examples:
· Funded with pre-tax money therefore may receive tax-deduction today
· Money grows tax-deferred
· Taxed upon withdrawal
2. Tax-free accounts: Think Roth IRAs and Roth 401(k)s
· Funded with after-tax money
· Money grows tax-free
· Tax free withdrawals *if meet the age and holding period requirement*
3. Post-tax accounts: Think taxable brokerage account
· Funded with after-tax money
· Taxed while it grows due to interest and dividends
o Taxes owed on dividends depends on if its ordinary dividends or qualified dividends
· Taxed upon sell of your investments, if gain it is either a LTCG or STCG
o LTCG = long-term capital gain, held for more than 12 months
o STCG = short-term capital gain, held for less than 12 months
What happens if you take a loss in a taxable account? I will discuss in more detail in a later post.
It is not about avoiding taxes, but rather managing them wisely and minimizing not only your tax bill today, but also minimizing your lifetime tax bill. Every individual’s situation is unique, so consider consulting a financial advisor and tax advisor to help tailor a strategy for you.
Disclosure:
Retirement Planning Solutions, LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Retirement Planning Solutions, LLC by the SEC nor does it indicate that Retirement Planning Solutions, LLC has attained a particular level of skill or ability. This material prepared by Retirement Planning Solutions, LLC is for informational purposes only and is accurate as of the date it was prepared. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Advisory services are only offered to clients or prospective clients where Retirement Planning Solutions, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Retirement Planning Solutions, LLC unless a client service agreement is in place. This material is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Retirement Planning Solutions, LLC is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.