How tax diversification can fuel your savings goals

Key Points

  • Use smart tax strategies to keep more of the money you’ve earned.
  • A tax-diversified mix of assets can help provide tax efficiency now and in the future.
  • Work with your tax and financial advisors to develop a strategy that supports your goals.


Tax season is an opportune time for you and your financial advisor to review the tax treatment of your retirement assets. Strategically distributing your assets among three tax categories can help you keep more money in your pocket. 

This category includes:

  • 401(k)1,2, 403(b)and 457(b) defined contribution plans
  • Traditional IRAs1,3,4
  • Pension plans1
  • Deferred annuities1

The majority of U.S. retirement assets are held in tax-deferred employer plans, which offer the benefits of pre-tax contributions (lowering your annual taxable income) and tax-free growth to accumulate more savings for retirement.

Beginning at age 59 1/2, your withdrawals are taxed as ordinary income, but you won’t pay the 10% early withdrawal penalty.

While it’s wise to take advantage of available employer contributions and annual tax savings, funding your future exclusively with tax-deferred investments can result in a heavier tax burden in retirement.

This category includes:

  • Roth IRAs1,5
  • Municipal bonds/funds6
  • 529 savings plans7
  • Cash-value life insurance policies5,8

Consider some tax-free investments, especially if you expect to be in a higher tax bracket in retirement. You generally won’t pay taxes on withdrawals if certain requirements are met.

Because these investment vehicles aren’t subject to annual required minimum distributions, you can accumulate tax-free earnings for as long as you like.

This category includes:

  • Bank accounts9
  • Brokerage accounts
  • After-tax mutual funds

Taxable assets help support your cash management strategy. Accumulating one to three years of living expenses in liquid assets can help you ride out volatility in a down market without selling other investments at a loss.

While the earnings and sale of taxable assets are subject to current taxes, you may be able to receive preferential tax treatment on long-term capital gains and qualified dividends.

We can help

Meet with your tax and financial advisors to implement a tax-diversification strategy. Doing so could provide you with greater financial flexibility and control today and increase your income in retirement.

1Withdrawal before age 59½ may result in a 10% IRS penalty on taxable earnings.
2Special rules apply to appreciated employer securities in qualified retirement plans.
3Funded with after-tax dollars.
4Assumes that contributions to the IRA are deductible.
5Necessary requirements must be met. Consult with your tax advisor.
6Certain tax-exempt income may be subject to the alternative minimum tax, or state or local taxes. Taxable capital gains or losses may be incurred.
7When used for qualified higher education expenses; otherwise, you may have to pay income tax plus a 10% penalty to the extent of earnings.
8Death 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 may be subject to income tax to the extent of earnings.
9Bank deposits are FDIC insured up to $250,000 per depositor.
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.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.