Steven J. Rosenthal, CPA, CFP, JD
Tax Diversification: Minimize Your Liability And Ensure The Longevity Of Your Retirement Savings
Tax diversification is an essential element of retirement planning that should be considered along with investment diversification. It is a planning strategy that seeks to minimize tax liability before and during retirement. An investor can achieve diversification using accounts with different tax profiles. Tax diversification can help your assets last longer in retirement as part of a tax-efficient distribution strategy.
The strategy is implemented by owning various taxable, tax-deferred, and tax-free accounts and managing their interplay. Tax diversification lends itself to a long-term planning perspective because paying higher taxes on your investments today may result in an overall reduction of your total tax liability over time. In some years, it might make sense to recognize income by taking a distribution from a tax-deferred retirement account because it would lower required minimum distributions (RMDs) in the future. In other years, it might be appropriate to avoid taking retirement distributions because the payments would generate higher capital gains tax that year.
Tax laws and retirees’ portfolios constantly change, so one planning technique will not always reduce taxes. This is why tax diversification is necessary. By having a variety of account types, an investor can time purchases, sales, contributions, and distributions in a tax-efficient manner.
In the next few years, tax rates will most likely be rising. Large Federal budget deficits today mean that higher taxes will be part of plans to balance the budget in the future. Even without congressional action, tax rates for individuals will increase in 2026 with the expiration of provisions in the current Tax Cuts and Jobs Act. Tax planning is always a moving target, and tax diversification is integral to the planning process.
Please consult with Fulcrum Wealth Advisors for guidance on tax diversification and tax savings strategies with your portfolio. The following article provides more information regarding tax diversification. https://www.usatoday.com/story/money/taxes/2023/02/27/keeping-taxes-low-retirement/11342536002/