Where will your retirement paycheck actually come from? For many Springfield retirees, the answer may involve a 401(k), Traditional or Roth IRA, taxable investments, Social Security, and other income sources. Those accounts don’t all receive the same tax treatment, and that difference can become surprisingly valuable.
Tax diversification generally means holding retirement assets across multiple tax categories, such as tax-deferred, Roth, and taxable accounts. The objective isn’t to avoid taxes altogether. Instead, having different sources available may give you more choices about how to generate income as your needs—and tax circumstances—change.
Learn more about how tax diversification can fit into your retirement plan at LaTour Asset Management.
1. Gain More Control Over Your Tax Bracket
Imagine needing an extra $30,000 one year for a major home project. If all of your retirement assets are held in tax-deferred accounts, obtaining that money could mean recognizing additional taxable income.
With several tax buckets available, there may be other possibilities. Depending on your circumstances, an advisor could evaluate whether withdrawals from taxable assets, tax-deferred accounts, or qualified Roth distributions could be coordinated to manage taxable income. This flexibility can be useful for ordinary retirement spending, too, particularly when income needs vary from one year to the next.
2. Watch the Tax Ripple Effects Beyond Your Tax Bracket
A withdrawal can affect more than your income tax bill. Higher income may influence whether a portion of your Social Security benefits is taxable. Modified adjusted gross income can also affect Medicare’s Income-Related Monthly Adjustment Amount (IRMAA), potentially increasing Part B and Part D costs for higher-income beneficiaries.
Because qualified Roth IRA distributions generally do not increase taxable income, having Roth assets available may provide another option when coordinating retirement income. However, individual circumstances and applicable tax rules should always be reviewed carefully.
3. Prepare for Required Minimum Distributions
Tax-deferred retirement accounts eventually come with another consideration: required minimum distributions (RMDs). For many retirees, RMDs currently begin at age 73, although the applicable starting age depends on birth year. These distributions can create taxable income regardless of whether you actually need the money for expenses.
Roth IRAs generally do not require distributions during the original owner’s lifetime. Building multiple types of retirement assets earlier may therefore provide additional flexibility when RMDs enter the picture later.
4. Give Yourself More Options During Difficult Markets
Suppose the market falls just as you need money for living expenses. If you have appropriate cash reserves or other liquid assets available, you may have alternatives to selling investments that have declined in value. Diversification gives you more options, but there is no universal withdrawal sequence, though. Market conditions, taxes, portfolio allocation, and immediate cash needs can all influence which account may be appropriate to access.
Consider Adding More Options to Your Retirement Income Plan
A retirement plan becomes harder to adjust when every dollar comes with the same tax treatment. Building different sources of retirement income may give you and your advisor more tools for responding to taxes, RMDs, unexpected expenses, and changing markets. At LaTour Asset Management of Springfield, our advisors can help you evaluate how tax diversification may fit within your broader retirement strategy. Call our Springfield team at (877) 888-5724 to discuss ways to build greater flexibility into your retirement income plan.
