TAX DIVERSIFICATION: THE 3 TYPES OF ASSETS YOU SHOULD KNOW

Diversifying your assets to help safeguard your retirement savings isn’t by any means a new concept. In fact, it’s expected. What most people neglect to take into consideration is how tax can be a deciding factor in how you organize your financial portfolio.

Allocating your investment income to more than one type of account can allow you to have more control over how much you pay in taxes and when you have to pay them. In other words, it’s where you put your money that matters the most.

In order to diversify taxes when planning for retirement, it’s important to understand the types of assets that you will benefit from.

After-tax assets

These are taxed annually for interest and dividends or taxed upon withdrawal at potential capital gain rates or losses. These vehicles include brokerage accounts that hold investment-related securities, mutual funds, checking and savings accounts, and money market accounts.

All contributions into these vehicles are already taxed from your paycheck, and the net amount is what is contributed every year to your securities portfolio.

Pre-taxed assets
These will include your IRAs (rollover, traditional, SIMPLE, SEPP), pensions, 401(k) plans, and 403(b) plans. For the most part, all contributions into these vehicles except pension plans are pre-taxed and deducted from your AGI. The dollars withdrawn from these vehicles are taxed as ordinary income rates.

Tax-free assets

This includes Roth IRA, some specially designed life insurance products, interest from municipal bonds, and 529 plans, used for educational purposes. The dollars withdrawn from these vehicles are potentially tax free based on the underlying rules of those vehicles since state and federal income tax codes can vary from state to state.

Balancing where to put your money before retirement and how to withdraw the funds during your retirement can seem like a daunting task. However, the benefits can be exponential if done correctly.

To learn how you can begin applying these types of assets to diversifying your retirement taxes, check out our latest article on Forbes.com.

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