First, let’s look at the three types of accounts by their tax treatment.
Tax-Deferred Retirement Accounts are funded with untaxed dollars (contributions are tax deductible, either through salary-deferral or on your tax return). However, future withdrawals are fully taxed as ordinary income. Examples include 401(k)s and traditional IRAs.
Taxable Accounts are funded with after-tax dollars. Dividends and gains from sales receive preferential tax rates. Because you’re paying taxes in the years that income or sales occur, withdrawals aren’t taxed. These are usually mutual fund and stock accounts.
Roth Account contributions are not tax deductible. However, they grow tax-free forever, and withdrawals are never taxed.
It’s best to spread money across these three account types while you are working. This will give you some flexibility to manage your taxes in retirement, which could help your money last longer. Having different types of accounts also provides options for early retirees.
Optimal investment and withdrawal strategies are different for everyone. Factors include age, tax brackets, employer plan features, and investable income. Powerful retirement planning is best done well in advance and then annually while taking distributions.
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Retirement planning is one of the most important things that we do for clients. We would be happy to discuss your situation and how we might be of service.
