Tax-smart strategies can extend the life of your portfolio1 and provide flexibility if market conditions, life events or tax rates change throughout your retirement journey.
Tax-efficient withdrawals
- If applicable, take Required Minimum Distributions
- Withdraw from taxable accounts, particularly if there are long-term capital gains or qualified dividends that are taxed at preferential rates
- Take from non-qualified annuities, then other tax-deferred and finally tax-exempt
Exceptions to this are related to recognizing income up to the standard deduction and lowest tax brackets with taxable withdrawals from tax-deferred accounts and/or Roth conversions. Also, use Roth or non-taxable sources to keep from crossing into higher rates to meet cash needs.
Asset location
Asset location is a tax management strategy that takes advantage of the fact that different types of accounts/investments get different tax treatments. Using this strategy, an investor determines which securities should be held in tax-deferred and tax-free accounts and which securities should be held in taxable accounts in order to maximize after-tax returns. Note: Transfers between different types of accounts may be taxable events.
Tax-loss harvesting
No one likes to lose money on their investments. But with tax-loss harvesting you can at least get a tax benefit. Tax-loss harvesting involves selling a losing investment in order to generate capital losses that you can write off on your tax return to offset other realized capital gains (or if none, a limited amount of ordinary income each year). Be aware of wash sale rules. If you sell stock for a loss and buy it (or a substantially similar asset) back within 30 days before or after the loss-sale date, the loss cannot be immediately claimed for tax purposes, but is added to the new basis
Tax control triangle
Positioning assets for tax efficiency is important prior to retirement – the more lead time, the more options that can be considered, like an in-service distribution or contributing to a Roth IRA and/or HSA. When saving for retirement and other goals, investment accounts fall into three general categories: tax-free, tax-deferred and taxable. Although some strategies can be implemented post retirement, options are limited.
Tax-free2
Investments and insurance using pretax or after-tax dollars for tax-free growth.
Tax-deferred3
Investments using pretax or after-tax dollars for tax-deferred growth, taxable when withdrawn.
Taxable4
In general, investments using after-tax dollars for taxable income, including capital gains when realized, interest received or dividends paid.
Explore how a Roth IRA conversion may improve your financial plan:
Pretax example includes: HSA; After-tax examples include: Roth IRA, Roth 401(k), municipal bonds, cash value life insurance, tax-exempt mutual funds, 529 and Coverdell Education Savings Accounts
Pretax examples include: Traditional, SIMPLE and SEP IRAs, and employer-sponsored plans (401(k), 403(b), 457(b) and pension); After-tax examples include: Annuities, after-tax contributions in a traditional IRA or employer-sponsored plan
Examples subject to current taxation include: Mutual funds, stocks, bonds, checking/savings accounts
This information is not intended to provide specific recommendations to you, nor is it to be used as the primary basis for any investment decisions you might make. These are general tax considerations and do not take into account individual investor circumstances.
Some investment types (e.g., mutual funds) may be treated differently for tax purposes depending on the type of account (e.g., traditional IRA) they are held in. You should obtain your own independent tax advice based on your particular circumstances.
The amounts provided are a snapshot of your current financial position and can help you to focus on your financial resources and goals, and to create a plan of action. Neither Ameriprise Financial nor your financial advisor has undertaken to review or verify the accuracy of the information.
This is not a comprehensive assessment of the tax treatment for investments and accounts mentioned. The tax rules governing investments are complex, change frequently and depend on the individual taxpayer’s situation.
A Roth IRA is tax-free as long as investors leave the money in the account for at least 5 years and are 59½ or older when they take distributions or meet another qualifying event, such as death, disability or purchase of a first home.
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Roth IRA/Roth 401(k) – Necessary requirements must be met, withdrawal before age 59½ may result in tax and a 10% penalty on earnings.
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Cash Value Life Insurance – Death proceeds generally are not subject to income tax. 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.
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Municipal Bonds and Tax-exempt Mutual Funds – Certain income may be subject to the alternative minimum tax and/or state or local taxes. Taxable income, including capital gains or losses, may be incurred.
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529 and Coverdell Education Savings Accounts – If not used for education, may have to pay tax and a 10% penalty.
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401(k)/403(b), Small Business Plans (SEP and SIMPLE IRAs), Pension Plans or Traditional IRA - Withdrawals before age 59½ may result in tax and a 10% IRS penalty on the taxable portion of the distributions.
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For traditional IRAs – Assumes contributions are deductible.
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For 401(k) – Special rules apply to employer securities in qualified retirement plans. In IRAs, some investments may generate unrelated business taxable income which may incur the need for the IRA, not the taxpayer, to pay tax to the IRS.
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457(b) Plans – Unlike other tax-deferred retirement plans such as IRAs or 401(k)s, you won't face a 10% early distribution penalty, even if you are underage 59½.
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Non-qualified Annuity or Traditional IRA with after-tax contributions – Withdrawals before age 59½ may result in tax and a 10% penalty on the taxable portion of the distributions. Special rules determine the allocation of earnings to withdrawals.
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Stocks, Mutual Funds, ETFs, BDCs – Qualified dividends and long-term capital gains may be taxed at a lower rate.
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Master Limited Partnerships – Partners are taxed on their allocable share of the partnership’s net income.
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Collectables – Long-term capital gain taxed at max rate of 28%.
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Unit Investment Trust – Taxed as either mutual funds or grantor trusts
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Checking/savings – Not investments; demand deposit accounts offered by banks and credit unions. Interest is taxed as ordinary income.