🫰How to Keep What You've Saved💰

☕ Good morning!

Welcome back to another edition of Making Sense of Your Money, where we help you keep your hard-earned dollars in your pocket, instead of floating away 💸to Uncle Sam.

When it comes to retirement planning, we often think about how much to save—but where you save matters just as much. Tax diversification (stay with me here) is a strategy that gives you more control over how much Uncle Sam takes in retirement.

What is tax diversification? 🤔

In simple terms, it means spreading your money across different types of accounts that get taxed differently—so when tax rates change, you can choose how much you pay in taxes. That flexibility = more money in your pocket long-term. 🙌

Here’s a quick breakdown of your options:

• Tax-deferred accounts (Traditional IRAs, 401(k)s): Contributions lower your taxable income today, but you’ll pay taxes on withdrawals later.

• Tax-free accounts (Roth IRAs, Roth 401(k)s): You pay taxes on contributions upfront, but withdrawals are completely tax-free in retirement.

• Taxable accounts: Think regular brokerage accounts—where you’ll owe capital gains taxes, but they aren’t tied up by retirement rules.

Why tax diversification matters ❓

Imagine you’re about to retire, and tax rates have spiked. If all your retirement savings are in tax-deferred accounts like Traditional IRAs and 401(k)s, you’ll owe taxes on each dollar you withdraw at those higher rates.

But if you’ve diversified, you can strategically pull from tax-free Roth accounts or even taxable accounts to reduce your overall tax bill. Flexibility = freedom!

Tax diversification isn’t about predicting the future—it’s about being prepared for it.

Here’s the magic: The more account types you have, the more options you gain.

If tax rates are low one year, you can withdraw from your tax-deferred accounts, paying less in taxes. If they spike, pull from your Roth IRA for tax-free income.

This strategy helps smooth out the taxes you owe over the course of your retirement, allowing you to keep more of your money in the long run.

Avoid these common mistakes 🚫

Too many people rely solely on 401(k)s or Traditional IRAs for retirement savings. That’s a problem when tax rates rise (and let’s be honest, they probably will).

Not only that, but after age 73, you’re required to take minimum distributions from these accounts—even if you don’t need the cash. Hello, tax spike! 😳 

Roth IRAs, on the other hand, have no required minimum distributions, giving you more control over when and how to use your funds.

3 easy steps to diversify your retirement 🌟

If you want to diversify your tax strategy for retirement (and trust me, you do), here’s how to start:

1. Split your contributions: Contribute to both tax-deferred and tax-free accounts (hello, Roth 401(k) and Traditional 401(k)).

2. Consider Roth conversions: If you think tax rates will rise, converting some of your Traditional IRA to a Roth now could be smart. Yes, you’ll pay taxes upfront, but you’ll enjoy tax-free withdrawals later.

3. Don’t forget about taxable accounts: Keep investing in taxable brokerage accounts. They give you even more options in retirement.

Making Sense of Tax Diversification ✨

Tax diversification might sound like a complicated strategy, but it’s actually one of the simplest ways to set yourself up for financial success in retirement.

By building a portfolio with multiple types of retirement accounts, you ensure that no matter what happens with future tax laws, you’ll have options.

Remember, it isn’t about guessing what future tax rates will be—it’s about giving yourself choices.

If you’re not sure how diversified your retirement savings are, or you want to explore strategies to maximize your tax efficiency, let’s connect!

I can help you craft a retirement plan that ensures you’re keeping as much of your hard-earned money as possible, no matter what tax rates do.

Until next week!

Dan Pascone

P.S. Follow me on LinkedIn for more tax gems to save you money.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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