How to have a “Tax Wise” Retirement

How to have a “Tax Wise” Retirement

Today, we are talking about taxes and how they can lead to some surprises after retirement. This can be especially scary for anyone nearing retirement. Being “tax-wise” is no longer a concern for only the wealthy. Most fear that increased tax rates are looming on the horizon. That’s why it’s important understand tax diversification.  .

Lots of people believe  their personal tax bracket will be lower after they retire. However, it can surprise you that your income, after taxes, is less than you expect. Even, perhaps less than what you need. From a risk management perspective, you’ll need to diversify to deduce your exposure to the risk.  Creating a tax-wise strategy starts with understanding tax diversification

The “One-Trick-Pony” Approach

When looking at different retirement income sources there are a variety of financial vehicles. While a variety could result in “tax-wise” income strategies, most people aren’t tax-diversified. Which is why the “One-Trick-Pony Approach” has been coined.

Most people reach retirement with 95% or more total savings in a 401(k) or IRA. That is where the “one-trick pony approach” to retirement savings comes into play. This is the case because we are  “rewarded” with the postponed taxes. Don’t forget that these taxes are only postponed. When you retire, 100 percent of this money will be subject to taxation. Traditional retirement planning has dictated that it is OK to postpone taxes.  This is because you will probably be in a lower tax bracket after you retire. Tax diversification starts by considering how investment accounts are taxed. Then create many income streams with a tax-efficient withdrawal strategy.

To understand this, it’s important to look that most contracts can be in one of three categories.  It might be easier to think of these categories as buckets that you might use to hold your retirement assets.


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