Taking the time to understand what your tax liability is now compared to what it will be in retirement can create new planning opportunities that can be invaluable later down the line.

Most people know the benefits of putting money into a 401(k) versus a regular investment account. With the 401(k), you get a tax deduction whereas if you save money in a Roth IRA or a brokerage account you do not receive a deduction. In years where your current tax rate is higher than your tax rate will be in retirement, it is generally beneficial to put money in tax-deferred accounts. However, this is not always the case.

At Halyard Financial, we separate and track your assets into two categories on the account-level. There are tax-deferred assets and tax-advantaged assets. Tax-deferred assets include your 401(k), Traditional IRAs and most annuities. Tax-advantaged assets are monies that are easily accessible in retirement with little to no tax consequences. This includes your Roth IRA, brokerage accounts, and Health Savings Accounts.

We strive for every client to have at least 30% of their retirement assets in tax-advantaged accounts. This allows clients to help control their tax liability in retirement. You can distribute from the tax-deferred accounts up to a certain tax bracket and then access money from the tax-advantaged accounts for the rest of your annual distribution needs.

For many people, their income ranges right around the breakpoint into a high tax bracket. At this point, you may go from paying 12% to 22% on each additional dollar that you distribute from tax-deferred accounts. With proper planning, you can pull money from tax-advantaged assets to avoid paying the higher bracket.

This is extremely helpful for individuals that are in the delicate range of paying tax on their social security benefits. For individuals and families around the $20,000 – $60,000 taxable income range, you are taxed on a larger portion of your social security for each additional dollar of income. Deductions or the lowering taxable income have a much larger tax benefit at this range and your incremental tax savings could be as high as 40% when your tax bracket is only 22%.

There are many ways to work towards improving the relative allocation of your assets in tax-advantaged versus tax-deferred accounts. In years where you have lower income and are in a lower tax bracket, shifting your savings to Roth IRAs or to a brokerage may be beneficial even if you lose the initial tax savings. If you own a business and have a loss for a year, it may be wise to “create” income to utilize unused deductions. Going forward, everyone can have at least $12,000 of income tax-free. If you have money in a Traditional IRA, you can convert part of that money into a Roth IRA so that you utilize all your deductions.

You don’t need to wait until retirement to worry about taxes – and with proper planning, you can reap tax benefits that will make your nest egg go a lot further.

Written by Garrett Gould

Garrett Gould is a remote financial planner who specializes in long-term tax management. He is the co-owner of Halyard Financial and advises individuals, families, and small business owners throughout the nation. Garrett is an Enrolled Agent with the IRS who has passed all three of the CFA exams and has been creating financial plans for several years. Garrett is located on the Upper West Side in New York City.

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