Are you providing yourself enough options to prepare for retirement? This is an issue I address often while helping my clients plan for their future retirement needs. Typically, to create more options we work collaboratively to fill up three buckets of assets. These include:
1. Tax-deferred assets:
These are assets which you have deferred paying the taxes on until the time you choose to make a withdrawal from the account. These can include 401(k) retirement plans, 403(b) retirement plans and various forms of IRA accounts such as simple IRAs and SEP IRAs.
2. Tax-free assets:
These are assets which you have already paid taxes on. Growth in the account may be tax-free so long as certain conditions are met, which typically includes attaining age 59 ½ at the time of withdrawal. These include primarily Roth IRA accounts.
3. Taxable assets:
These are assets that are not in either of the tax-deferred or tax-free assets types. These types of accounts include taxable individual, joint, transfer on death, revocable or irrevocable trust accounts.
By developing these three asset buckets you will more effectively plan for the amount in taxes you will pay during your retirement years. What do I mean by that? Well, because you now have three different types of assets (the buckets above) you are able to choose how much to pull from each bucket to fund your retirement needs. For example, let’s say that you are looking to fund $10,000 of expenses per month. Instead of taking the entire amount from a tax-deferred account (which would be entirely taxable on the withdrawal), you could split this amount between the three buckets to avoid the potentially higher tax brackets and effectively lower the taxes you would need to pay in the long run.
As illustrated, you can give yourself more options for your retirement by utilizing different asset buckets and perhaps working more closely with your tax accountant and/or financial planner.