Changes in tax rules, much like the stock market, can be unpredictable, so how can you anticipate your tax bill in retirement? Having some tax diversification with your accounts may help you counter the ever-changing tax environment and provide you with some flexibility when you retire.
You can maintain balance by contributing to traditional and Roth Individual Retirement Accounts. But the focus of your contributions may change depending on your life stage and tax situation:
How much you withdraw from your investments may be the most influential factor in how long your money will last. Since every dollar you spend on taxes is one less you have to spend in retirement, the goal is to increase after-tax income. Tax diversification can help you structure withdrawals to potentially reduce taxes and increase the amount of after-tax spendable income.
Generally, we recommend taking withdrawals in the following order:
This sequence is just a guide, since the accounts and investments you use for withdrawals may vary from year to year depending on tax and investment considerations. For example, it may make sense to vary this sequence or take from multiple account types to help reduce taxes and prevent moving into a different tax bracket.
Since where you take withdrawals should depend on your tax and financial situation, it’s important to discuss your expected income and withdrawals with your financial advisor and tax professional each year.
Ask your financial advisor if the following are appropriate for your situation:
Together, you can discuss other strategies, including:
Tax diversification can help provide flexibility and sustainability for retirement savings. While tax codes may be complex and ever-changing, the solution doesn’t have to be. Talk to your financial advisor about how tax diversification can play a part in your long-term retirement goals.
Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.
Diversification does not ensure a profit or protect against loss.