Review:  How to Defuse the Tax Bomb in Your Retirement Plans

Taxes are no fun. Everyone has that accountant friend who really likes the intricacies of the tax code (ok, maybe that’s just us…), but most people want to avoid taxes as much as possible. Taxes always deserve your attention, but that’s especially true when you are thinking about your spending in retirement.

Tax-deferred accounts like traditional IRAs or 401(k)s are great. They can help you save for retirement, and they make it easier to reach your retirement goals. But notice those first two words – tax-deferred.

They may help you manage your taxes while you’re working, but you’re really just pushing your taxes down the road. Now, this is not necessarily a bad thing – in fact, it’s often a really good thing. But you need to be prepared for it, and make sure you are managing it appropriately.

You need to pay attention to managing your tax burden and making the most out of your tax-advantaged accounts on both sides – while you’re still working, and as you’re spending from your portfolio.

On the front end, you need to be aware of your asset location. This is pretty much what it sounds like. You want to make sure that you place assets appropriately in your portfolio to make sure you take advantage of the different tax statuses of your different investment accounts.

You also want to think about your withdrawal sequencing.  The order you take money out of your portfolio can make a big difference in the amount of taxes that you need to pay.

For more on making sure you get the most out of your investment accounts, read our ebook Spending From Investment Portfolios


 

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