Let's Get Started
You'll get the most value from financial planning if your specific goals and needs match a firm's philosophy and services. Let's learn more about each other.
Ready to Get Started?
Within your working life, you may not be focused on tax efficiency in saving. However, there are small steps that can be taken now that can have a great impact in reducing your taxes later in retirement. Paying attention to possible tax advantages early on can set you up for great future success. We believe that the key to this success is utilizing three different account types toward saving throughout your working career.
Within this account type, you receive a tax deduction for contributions, and tax is paid on withdrawals – typically in retirement.
It is especially important to save enough in a 401(k) account to receive a full employer match. These matched savings can add up very quickly and can be extremely significant in your overall retirement portfolio.
Later on as you change jobs, your 401(k) can be rolled into a traditional IRA. Traditional IRAs have very similar tax treatment as your 401(k), and can allow you to consolidate accounts if you change jobs frequently, and may also be beneficial by providing you more investment options.
Saving to a tax-deferred account reduces present taxes, but creates taxes for you in retirement. While many who are saving for retirement believe they will be at lower tax rates later on in retirement, that is not always the case. In fact, we have seen an over-reliance on these types of accounts from those who are retiring today. This has led many retirees today needing to perform Roth conversions now to prevent large tax liabilities later in retirement.
Tax-exempt accounts are extremely important toward saving in a tax efficient manner. Contributions to this account are taxed now, but they grow tax-free. Withdrawals from this account in retirement are tax-free as well. That makes Roth accounts an extremely beneficial supplement to other account types to create the greatest tax advantage.
For younger savers who are just starting in their careers, Roth savings are usually their highest priority for retirement savings.
We were recently interviewed for an article on Yahoo Finance about this very topic. Forgoing Roth savings may be a young saver’s biggest mistake!
A taxable brokerage account may not have as many tax advantages, but they are useful because they have fewer restrictions and are much more flexible than tax-advantaged accounts. For instance, there are no income requirements or contribution limits on these accounts. There are no penalties for withdrawals before retirement, like an IRA or Roth IRA earnings. Investors can choose from unlimited investment options toward these savings as well.
Taxable brokerage accounts can be very tax beneficial toward saving for goals that you would like to achieve before retirement. Even in retirement, because these accounts are taxed differently than IRAs, these accounts can help you avoid large tax liabilities in during high spending years.
| Tax Payment | Growth | Pre-Retirement Withdrawal | Post-Retirement Withdrawal | |
| Tax-Deferred | Later | Tax-Deferred | Penalty & Taxes | Pay Taxes |
| Tax-Exempt | Now | Potentially Tax-Free | Penalty & Taxes on earnings | Tax Free |
| Taxable Accounts | Now and Later | Tax-Deferred | No Penalty (Can Withdrawal Anytime) | Taxes (on earnings, at lower rates) |
There are many aspects about each account type that make it unique. With these unique elements come different tax items that are important to consider when saving for the future. Throughout the time that you invest, you will have different needs that will benefit from having a variety of account types. It is important to take advantage of all three of these account types in order to create the greatest tax benefit overall.
A good financial planner and planning tool can help you figure out your saving strategy throughout your working life so that you know you can be most tax efficient. We help our clients create long term savings plans to ensure they are not creating large tax liabilities in retirement.