How to Run a Simple Tax Efficiency Check on Your Retirement Accounts

As one gets closer and closer to retirement, it’s important to put real time and thought into ensuring that your savings will be in good shape for the foreseeable future. Taxes can drain your account quickly before you realize what’s happening, but there are plenty of strategies you can employ to keep more of your money in your hands. To maintain your comfort during your golden years, it is essential to form tax-efficient retirement planning strategies that protect your finances. In this article, we’ll explain how to keep your accounts in good health and explore tax-efficient investing in retirement. 

Understand Your Retirement Account Inventory

Before your retirement begins in earnest, it’s imperative that you understand the fine details of your financial situation. Take inventory of all of your current assets, as well as your sources of income and how they are taxed. Social Security, pensions, and retirement savings are all taxed at varying tax rates. This step gives you greater control over the management of your funds and better sets you up to achieve your financial objectives in the long run. 

Diversifying your portfolio with different stocks and periodically reviewing those investments in another way to lower your risk profile and increase potential returns. 

Evaluate Your Asset Location Strategy

Diversification is a key tenet of any tax-efficient retirement planning, but where these investments are held is another crucial factor. Asset location describes the processes behind placing your investments in certain types of accounts to lower your taxes. 

There are the main account types to keep in mind: your Roth IRA, tax-deferred accounts, and taxable brokerage accounts. Here is an overview of each account and what makes them appropriate for different examples of investments:

• Roth IRA – Roth IRAs feature tax-deferred growth and could offer tax-free withdrawals post-retirement. They are best for growth-based investments that you expect to grow as assets over time. Dividend-paying equities are also a good fit for your Roth account. 
• Tax-Deferred Accounts – Tax-deferred accounts enable the account holder to protect or delay their taxation while it grows. These accounts are great for most assets that produce taxable income. Municipal bonds are one of the few exceptions, as they are already tax-exempt by default, meaning there is no benefit to holding them in a tax-deferred account. 
• Taxable Brokerage Account – Per the name, taxable brokerage accounts are not exempt from taxation in the way that Roth or tax-deferred accounts are, making them a bad fit for assets that are actively producing income. Gains made from selling investments held in a brokerage account for less than a year and one day are taxed at your current income tax rate; gains made from a sale of an investment held for longer than a year and one day get a lower tax rate. Index funds are best held here, as they tend to have low turnover. 

Your withdrawal strategy also plays a big role in how your money is taxed. Ideally, everyone would begin with their taxable brokerage account, moving on to the tax-deferred and Roth accounts before using a Roth conversion to reduce overall taxes. Unfortunately, this sequence of events isn’t always possible. Any withdrawal strategy must be based on your current assets and long-term goals. 

Review Your Investment Strategy for Tax Efficiency

Even the most thought-out retirement plan is liable to be affected by the unpredictability of life. Any number of life events, be it moving, returning to part-time work, or unexpected cost-of-living increases, could impact your tax status. If one of these changes occurs in your life, then you should meet with a trusted tax professional to reevaluate your investment strategies. Even without this impetus, it’s smart to check in with your strategy and confirm that it is working as intended. 

Contact Us at Prosperity Group Advisors to Learn More About Our Financial Services

Tax planning can be an intellectually and emotionally complex endeavor. Any consideration of a post-professional future can be overwhelming for some people, even before you take potential changes to tax rates or related laws into account. Taking on the entire process on your own can lead to missed details or muddled thinking. Finding the right partner ensures that no stone is left unturned when determining your optimal tax management strategy. Prosperity Group Advisors is confident that we will be that partner for you. 

Our team of qualified professionals will provide the knowledge and advice on how to make the best financial decisions and maximize your retirement income well into the future. Contact us today to schedule a no-obligation meeting in-person, virtually, or over the phone to learn how Prosperity Group Advisors can help make your retirement years as comfortable as possible.