Get Six Figure Tax Savings!

Different types of retirement accounts offer different tax advantages. Many people believed that tax-deferred accounts were the way to go so, they socked a lot of money away in 401(k)s and traditional IRAs. This seems like a good strategy until you see the tax diversification from the other angle.

“Every dollar you lose to taxes is one less dollar in your pocket,” says Maria Bruno, Vanguard’s head of U.S. wealth planning research. “Holding different account types helps manage uncertainty around future tax rates because we don’t know in 20 to 30 years, what the tax regime will be or what your personal tax rate might look like.”

In the same article in USA Today, it was reported that Jeremiah Barlow, Mercer Advisors’ head of family wealth services, had a client who retired, didn’t yet have to take Required Minimum Distributions (RMDs) or Social Security and paid zero taxes on $100,000 that was distributed from a taxable account. This is why it’s important to have tax diversification.

What is tax diversification? Diversification is a risk management technique that mitigates risk by allocating investments across different financial instruments, industries, and several other categories. The purpose is to maximize returns by investing in different areas that would yield higher and longer term returns. You can apply these same techniques to taxes.

Saving for retirement in a tax-deferred account seems like a good idea at first. But, when you’re forced to take that money out in the form of RMDs, you’re likely at a higher tax rate than you were when you were working. This forces you to pay more taxes.

Here is one simple tax diversification strategy. If you are between the ages 59-½ and 73, if you’ve stopped working (or work part time) and you are old enough to withdraw from tax-deferred accounts without penalties, but under the age to take required minimum distributions, consider gradually reducing your tax-deferred accounts. Now is the time to get your money out of the tax system.

I want to teach you about four other strategies that can save you up to six figures in taxes.

• Strategic rollouts. This is where you manage marginal tax brackets. I’m reminded of our client, Rob, who transferred IRA savings at the lowest tax rate and gained future tax-free income! I also think of Jon, who un-taxed his RMDs into a tax-free, lifetime income.
• Strategic offsets. This involves using specific deductions to reduce taxes. Our client, Al, was able un-tax $500,000 in income using offsets. Another client, Frank, un-taxed $400,000 of his traditional IRA by converting it to a Roth IRA.
• Strategic Roth Alternative. Using this strategy, Barbara was able to create a $50,000 a year tax-free income when she retires.
• Tax-Free Family Wealth Transfer. Nancy and her husband, Jon, created a tax-free legacy for their children, turning $300,000 into $10 million – all Tax-Free!