It doesn’t matter if you are starting your working career, halfway through it, or close to retirement, it is never superfluous to save money to enjoy a few loose golden years, and in the process, knowing where you are investing and how to grow your resources is too important, as retirement specialized financial advisors emphasize.
According to experts, the right mix of retirement accounts can be an effective strategy to reduce your future taxes. A combination of pre-tax, after-tax and taxable brokerage accounts can provide flexibility during retirement and minimize tax burdens. Experts suggest that this diversification can help to better manage income and reduce taxes payable.
Many workers have their savings concentrated in tax-deferred accounts, such as pre-tax 401(k) plans or traditional individual retirement accounts (IRAs). These accounts involve regular income taxes at the time of future withdrawals, based on the federal tax brackets.
Benefits of Roth and Brokerage Accounts: How This Saves Taxes
However, many financial advisors recommend a combination of Roth accounts, both before and after taxes, along with taxable brokerage accounts to achieve greater flexibility in retirement. Judy Brown, a certified financial planner with SC&H Group in Washington, DC and Baltimore, notes that the right combination can provide “many different levers to actuate and manage your adjusted gross income.”
Pre-tax account distributions could move you into a higher tax bracket or lead to higher Medicare Part B and D premiums. Medicare Part B and D premiums are based on so-called modified adjusted gross income, which includes your adjusted gross income plus tax-exempt interest from the previous two years.
By comparison, after-tax account distributions, such as Roth 401(k) plans or Roth IRAs, generally do not generate taxes and will not increase your income. This can be a significant advantage when planning your retreats.
Taxes on Brokerage Investments
The issue of taxable brokerage investments can also be taken into account. If you hold these assets for more than a year, you will pay 0%, 15% or 20% on capital gains, depending on your taxable income.
Even for those higher-income taxpayers who could face an additional 3.8% tax on brokerage assets, the combined rate is still considerably lower than the top marginal tax rate of 37% on pre-tax account distributions.
Combine Flexibility and Adaptability with These retirement plans
Experts also advise valuing a combination of Roth assets before and after taxes, along with taxable assets, can help you “adapt to changing tax laws and personal financial circumstances” to better manage withdrawals and taxes, as explained by Alyson Basso, a certified financial planner and CEO of Hayden Wealth Management in Middleton, Massachusetts. This strategy allows you to have more control over your income and minimize taxes throughout retirement.
Achieving the perfect fiscal balance will depend on your fiscal goals, your risk tolerance, and your retirement timeline. In any case, always consult with your trusted financial advisor to reach a balance point between adequate retirement plans and correct and legal cuts in your tax bill. By diversifying your savings between pre- and after-tax accounts, and taxable brokerage accounts, you can achieve greater flexibility and potentially reduce your tax burden in retirement.