How to Keep More Money in Retirement: Diversification That Minimizes Taxation – Kiplinger’s Personal Finance

Posted: October 20, 2019 at 8:46 am

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No one likes paying taxes, especially once you've retired and are no longer earning a paycheck. So here are some steps to consider now that could pay off later.

Although you cant control all the challenges you might encounter as you move toward and through retirement, having a well-thought-out plan can help you be better prepared. Thats especially true when it comes to two of the biggest risks to a confident and successful financial future: market volatility and taxation.

Youve probably heard a lot about volatility lately, as the market reacts to the latest news about interest rates, trade wars and the possibility of an economic slowdown. If those up-and-down movements make you nervous, it may mean your diversified portfolio isnt set to a mix that fits with your risk tolerance, and its time to talk to your financial professional about making some adjustments.

While youre at it, you should get the ball rolling on a plan to control taxes, which arent getting as much attention in the news right now but could be an even bigger threat to your income in retirement. Given the tax environment were in right now, and the potential tax environment we could see in the near future, its important to truly diversify your portfolio so that you dont own too many assets that are taxed in the same way or are taxed at the same time.

To do that, it helps to picture three buckets holding your investments.

If youre like a lot of savers, you probably have most or all your investments in that middle bucket the taxed-later bucket and that could be a problem. Heres why: Those accounts served you well by saving you on taxes every year while you were working, but when you start tapping into them in retirement, the money you withdraw will be taxed as ordinary income. Or, as I often tell my clients: Getting money into a retirement account is easy. Getting money out of that retirement account can be challenging and expensive.

Let me explain. Those tax-deferred accounts include a debt people often forget. Heres a good way to look at it:

If you own a house, and its worth $500,000, but you still owe $200,000 on the mortgage, you know you dont have a $500,000 asset. You have a $300,000 asset. In the same way, if you own a 401(k) worth $500,000, the money in there isnt all yours. You owe a good portion of it to the IRS, which has been waiting for payment for years. The taxed-later bucket is a tax postponement retirement plan.

As soon as you start taking your share of the money, the IRS is going to want its share as well. Even if you decide not to withdraw the money because you dont need it maybe your Social Security benefits and pension have you covered the IRS is going to require you to take minimum distributions (RMDs) starting at age 70.

Those distributions could bump you into a higher tax bracket and possibly cause you to have to pay taxes on a higher portion of your Social Security benefits. You might even have to pay more for your Medicare Part B and D premiums. Add to that the risk that if youre drawing money from your investments in a market downturn whether its necessary for income or RMDs you could end up with far less money to live on in your later years. This could have a devastating effect on your lifestyle.

Let me ask you a couple of questions: Would you borrow money from a bank if it didnt disclose in advance what the interest-rate charge was going to be over the life of a loan? Has the IRS disclosed how much it can charge you in taxes over your entire lifetime? This is the challenge with the taxed-later bucket!

Another thing to consider is that Congress is working on a new rule that would require most non-spouse beneficiaries to draw down inherited retirement accounts within 10 years of the original owners death, instead of letting heirs spread out their distributions over a longer time in whats known as a stretch IRA. If you planned to leave your tax-deferred account to your children, you might just be handing over a tax burden along with it.

The good news is its never too late to make changes that can help save you money and better secure your retirement. There is no better time than now to get those changes underway. Thanks to reforms that have reduced tax rates through Dec. 31, 2025, taxes are effectively on sale for the next seven years! By converting the money from your tax-deferred retirement accounts to an after-tax Roth IRA or similar type plan over the next few years, and paying the taxes on the money as you go, you can get rid of the debt you owe to Uncle Sam now for what is almost certainly a lower cost overall than what you would pay in retirement.

Most are predicting that tax rates will go up after the current reforms sunset and much higher rates arent unprecedented. The current top rate is 37% for those whose taxable income is over $510,300 (individuals) or $612,350 (married filing jointly). For the middle two tax brackets, the current rates are 22% and 24%. Historically, rates have been much higher. In 1944, the top federal rate peaked at 94%. And in the 1950s, 60s and 70s, the top rate remained high, never dropping below 70%.

This is an opportunity to start converting your assets by diversifying your portfolio into a more tax-efficient investment model. In a world filled with what-ifs and worrying news, its a positive step you can take to protect your retirement dream.

Kim Franke-Folstad contributed to this article.

Investment advisory services offered only by duly registered individuals through AE Wealth Management LLC (AEWM). AEWM and Retirement Planning and Investment Solutions LLC are not affiliated companies. Safe Money Financial Solutions LLC is our name and it does not promise or guarantee investment results or preservation of principal. Neither the firm nor its agents or representatives may give tax advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investing involves risk, including the potential loss of principal. Any references to security or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. 00275976

As an Investment Adviser Representative and founder of Retirement Planning and Investment Solutions LLC (, Ronald Anno focuses on creating tax-efficient retirement plans that help people achieve their financial goals and strives to ensure they won't run out of money during retirement.

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How to Keep More Money in Retirement: Diversification That Minimizes Taxation - Kiplinger's Personal Finance

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October 20th, 2019 at 8:46 am

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