Tax diversification: A tax strategy to help your assets last
Siena Wealth Advisory Group
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Jul 22, 2023
Florida - Southwest
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Your retirement could last several decades, so it’s important to not let taxes diminish your savings more than necessary. One way to safeguard against this is through implementing a strategy called tax diversification that spreads out your investments across various tax treatments over a long period.
Here’s how tax diversification can potentially help you keep more of your hard-earned retirement savings:
What is tax diversification?
Tax diversification is a strategy that takes into consideration various tax treatments across the investment accounts you will eventually use for income in retirement. Because different types of accounts and investments offer specific tax advantages, you can gain more control over your taxes by placing your investments in a variety of accounts. When coupled with a tax-efficient withdrawal strategy, tax diversification may help your assets last longer in retirement. Taxation is just one consideration when making investment decisions.
How tax diversification works
There isn’t a one-size-fits-all approach for tax diversification. An Ameriprise financial advisor can work with you to make personalized recommendations based on your financial goals, time horizon, account mix and tax situation.
An Ameriprise financial advisor can review your investment accounts through the lens of the three different types of tax treatments — taxable, tax-free and tax-deferred — and decide how to strategically allocate your assets among them.
The idea is to diversify your retirement funds among different account types during your working years as you save for retirement. There are a couple ways to achieve this: You can diversify as you save, and you can also move investments in and out of the different types of accounts after you have saved into them. However, moving investments in and out of a taxable account can have tax consequences, while moving investments in retirement accounts, like traditional or Roth IRAs, generally won’t.
Breaking down the different tax treatments:
What are key benefits of tax diversification?
In general, many investors gravitate toward tax-deferred accounts — such as a 401(k) — and thus, tend to be overweighted in investments that will be taxed in retirement.
By diversifying your investments across all tax treatments, you can:
- Take more control of your financial picture, now and in retirement. Taxable and tax-free accounts, other than the Roth 401(k), do not have distribution requirements, allowing you to control when and how much you take. Tax-deferred qualified accounts generally require distributions at age 73,9 but you control distributions from tax-deferred accounts before age 73 and amounts you take over the RMD.9
- Potentially fuel savings over time and help your assets last longer. Being able to choose which assets are used to create your income could allow you to spread your taxable distributions over more years so you pay less in taxes and keep more of your savings.
- Gain flexibility in how you access retirement income in the future. Life events are likely to change your savings and income needs in the future. Diversifying your savings among these different tax treatments will give you greater flexibility as life events, both expected and unexpected, occur.
When should an investor consider tax diversification?
Some opportunities may exist to diversify your tax situation during retirement, but in many cases tax diversification should be done over time. The sooner you consider how and when your retirement assets are taxed, the more time you have to make adjustments and accrue any potential benefits.
- To view the original version of this article visit www.ameriprise.com/financial-goals-priorities/taxes/tax-diversification-retirement
- Seniors Blue Book was not involved in the creation of this content.
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