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How tax diversification can fuel your savings goals

Diversifying your portfolio between tax-free, deferred-tax, and taxable accounts can pay off in the long run. Here’s how a tax diversification strategy can help your assets last longer.

Your retirement could last several decades. So it’s important to not let taxes diminish your savings more than necessary. Your financial advisor will review the tax treatments across your investment accounts during your working years. When you retire, they can also help you develop a sustainable withdrawal strategy with taxes in mind.

By considering tax diversification as you invest, you can:

  • Potentially fuel savings over time and help your assets last longer
  • Gain flexibility in how you access retirement income in the future
  • Take more control of your financial picture, now and in retirement

What is tax diversification?

Over a 30-year period (such as retirement), a planned approach for the tax treatment of your retirement assets could save you money in taxes. Tax diversification is a strategy that takes into consideration various tax treatments across the investment accounts you will eventually use for income after you stop working. Coupled with a tax-efficient withdrawal strategy, tax diversification could help your assets last longer in retirement. Taxation is just one consideration when making investment decisions. Here’s a refresher on the three tax treatment categories:

Tax-deferred Taxable Tax-free
  • Contributions made with pre-tax or after -tax dollars
  • Money grows tax deferred. Distributions are generally taxed at ordinary income rates.
  • Examples: 401(k),1, 2 403(b),1 457(b), traditional IRA,1 pension plans,1 annuities1
  • Contributions made with after-tax dollars
  • Taxable income, including capital gains when realized, interest when received or dividends when paid.3
  • Examples: mutual funds, stocks, bonds, bank accounts4
  • Contributions made with after-tax dollars
  • Earnings can be tax free, provided certain conditions are met
  • Examples: Roth IRA, 1,5 Roth 401(k),1,5 529 plan,6 municipal bonds,7 cash value life insurance8
Considerations when making contributions:    
You anticipate you will be in a lower tax bracket during retirement. Taxable distributions are generally taxed as ordinary income upon withdrawal.     You want more flexibility for when you can withdraw your money and don’t want to consider required minimum distributions (RMDs). You want to withdraw money in retirement without being pushed into a higher tax bracket.


Keep more of your money

You work hard to save for retirement. The sooner you consider how and when your retirement assets are taxed, the more time you have to accrue the benefits. Because there isn’t a one-size-fits-all approach for tax diversification, your financial advisor, working with your tax advisor, will make personalized recommendations based on your financial goals, time horizon and tax situation. Contact your financial advisor today.

An Ameriprise advisor can provide personalized advice to help you reach your financial goals.

Or, request an appointment online to speak with an advisor.


At Ameriprise, the financial advice we give each of our clients is personalized, based on your goals and no one else's. 

If you know someone who could benefit from a conversation, please refer me.

Background and qualification information is available at FINRA's BrokerCheck website.

1 Withdrawal before age 59 1/2 may result in a 10% IRS penalty on taxable earnings.
2 Special rules apply to appreciated employer securities in qualified retirement plans.
3 Dividends and long-term capital gains may be taxed at a lower rate. Interest may be taxable even if not received, for example, if from a CD or OID. For certain short-term debt instruments, interest is taxed at maturity.
4 Bank deposits are FDIC insured up to $250,000 per depositor.
5 Necessary requirements must be met. Consult with your tax advisor.
6 When used for qualified higher education expenses; otherwise, you may have to pay income tax plus a 10% penalty to the extent of earnings.
7 Certain tax-exempt income may be subject to the alternative minimum tax, or state or local taxes. Taxable capital gains or losses may be incurred.
8 Death proceeds generally are not subject to income tax. Loans from a non-Modified Endowment Contract (MEC) policy are not subject to income tax unless the contract lapses or is surrendered. Loans from an MEC policy are subject to income tax to the extent that there is gain in the policy. Partial or full surrenders from a life insurance contract (and in some cases loans) may be subject to income tax to the extent of earnings.
Ameriprise Financial cannot guarantee future financial results.
Diversification does not assure a profit or protect against loss.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.

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