How to Help Make Retirement Less Taxing

March 01, 2018

Man and woman on laptop computer

Tax rules have changed for 2018, of course – but what will they be like when you’re ready to retire? Since no one can predict this, you’ll want to be prepared with tax diversification, or having money in accounts with different tax treatments (taxable, tax-deferred and tax-free). Tax diversification can help structure withdrawals to potentially reduce taxes and increase the amount of after-tax spendable income.

Tax-advantaged accounts: Benefits now and later

Placing money in tax-deferred accounts, such as a traditional IRA, can provide you with tax deductions now. Contributing to tax-free withdrawal accounts, such as a Roth IRA, can provide you with tax-free income when you withdraw money later (in retirement). While your situation and the tax code may be anything but constant, one thing is certain: Flexibility is an important advantage to having money in different types of accounts.

An orderly withdrawal process

Since every dollar you spend on taxes is one less you have to spend on your retirement goals, it makes sense to focus on your after-tax income. After considering your income received from Social Security or pensions, as well as any guaranteed payments or income you might receive from annuities, you’ll likely take withdrawals from your investment portfolio to provide for your income needs. Generally, we recommend taking withdrawals in the following order:

  1. Any required minimum distributions (RMDs)
  2. Dividends/interest from taxable accounts
  3. Taxable accounts (positions with losses first, if available, then gains)
  4. Tax-deferred accounts (traditional IRA)
  5. Tax-free withdrawal accounts (Roth IRA)

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. 

Don't go it alone

There are additional investment considerations you can explore with your financial advisor for your retirement savings. 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.

Important Information:

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.

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