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How tax diversification can fuel your savings goals

Given retirement could last several decades, 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?

Tax diversification is a strategy that considers the various tax treatment of 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. Here’s a refresher on the three tax categories:

Tax-deferred Taxable Tax-free
  • May be funded with either pre-tax or after-tax contributions
  • Money grows tax-deferred
  • Distributions are generally taxed at ordinary income rates
  • Examples: 401(k) 2, 3, 403(b)2, 457(b), traditional IRA 2, 4, 5, pension plans 2, annuities 2
  • Funded with after-tax contributions
  • Income subject to current taxation; including capital gains when realized, interest received, or dividends paid.  1
  • Examples: mutual funds, brokerage, managed, banking6
  • Funded with after-tax contributions
  • Money grows tax-free 
  • Distributions are generally tax free when certain conditions are met
  • Examples: Roth IRA 2, 7, Roth 401(k) 2, 7, 529 plan 9, municipal bonds 8, cash value life insurance 6, 10
Considerations when making contributions:    
You anticipate you will be in a lower tax bracket during retirement. 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 address how and when your retirement assets are taxed, the more time you gain to accrue the benefits. Because there isn’t a one-size-fits-all approach for tax diversification. 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.
 

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

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

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1Dividends and long-term capital gains may be taxed at a lower rate. Interest may be taxable even if not received, if, for example, from a CD or OID. For certain short-term debt instruments, interest is taxed at maturity.
2Withdrawal before age 59½ may result in a 10% IRS penalty on taxable earnings.
3Special rules apply to appreciated employer securities in qualified retirement plans.
4Funded with after-tax dollars.
5Assumes that contributions to the IRA are deductible.
6Bank deposits are FDIC insured up to $250,000 per depositor.
7Necessary requirements must be met. Consult with your tax advisor.
8Certain tax-exempt income may be subject to the alternative minimum tax, or state or local taxes. Taxable capital gains or losses may be incurred.
9When used for qualified higher education expenses; otherwise, you may have to pay income tax plus a 10% penalty to the extent of earnings.
10Death 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.
Ameriprise Financial cannot guarantee future financial results.
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.