TAX-Diversifying Retirement Accounts: What is tax diversification and how does it work? By Antonio FilipponeMany Retirees are too heavily invested in tax-deferred investments. This can cause some serious problems and raise some important questions: What is tax-deferral? What is tax-diversification? What problems can arise from not being tax-diversified? How much will converting to a Roth IRA cost me in taxes this year? Before we get into these important tax details, if you are getting close to retirement make sure you check out this FREE retirement video, Avoid This Big Retirement Mistake And Retire Stress-Free! Now let us answer some of these questions. What is tax-deferral? *Graph Shows Hypothetical Example ONLY* Tax deferral is when your money grows uninterrupted by taxes until you take it out of your account. You get interest on your interest allowing money to compound free of tax. But tax-deferral is NOT tax-free! Eventually, you will have to pay. When? When you take the money out, sometimes years later. It can be super helpful because a tax-deferred account will grow faster than one that has to stop along the way and pay the government each year. What is Tax-Diversification? There are 3 ways money can grow. Fully-taxable as earned. Tax-deferred Tax-FREE Having too much money in any one situation can be a problem. We all know not to have too many eggs in one basket when it comes to our investments. Tax-diversification is the same idea. Its not good to be out of balance with too much money in fully taxable or tax-deferred. What Problems Can Arise From Not Being Tax Diversified? Many problems can arise from not having the right mix. Here are just a few. High RMD’s that cause lack of control over taxation later in life. Social Security can be taxed more than necessary. No access to lump sum cash for emergencies without causing tax burden. Fear of spending retirement dollars due to the tax-bill Exposure to future Government hikes in tax rates Watch this video to see the effect of taxes on your retirement health care: How Can You Re-Allocate Your Money For Tax-Efficiency? While becoming more tax-diversified is often a good idea it can be confusing. Questions arise such as: What if I do not qualify for a tax-free Roth IRA? Can I convert some of my tax-deferred money into tax-free? How do I know if a conversion will cost more than its worth? How much will be converted to a Roth cost me in taxes this year? Is there a way I can get my fully taxable money into a tax-free account? Are municipal bonds REALLY tax-free? Which is better a LIRP or a ROTH? There are many ways you can start becoming more tax diversified. For example, you could: Open a Roth IRA (If you qualify) Start up a LIRP plan Look into systematic Roth IRA conversions over time. No matter what you do it will be best to consult with your tax advisor or a qualified Financial Advisor. Everyone’s tax situation is quite different. At Rockford Retirement Planning, Inc we like to look at tax planning as one important part of a holistic Financial Plan. There is an order to how you need to look at things. For example, if you are on track to run out of money in retirement you first need to fix your income plan before you worry about paying taxes on money you might not have. To find out more about proper income planning and How To Avoid This Big Retirement Mistake And Retire Stress FREE Click Here.
