Many people start planning for retirement by focusing on one primary objective: saving enough money to retire comfortably when they are ready.
Taxes are something that no one enjoys paying; however, every person is responsible for paying taxes. Therefore, you should consider tax strategies that will assist you in holding on to and transferring more of what you worked so hard to accumulate.
Consideration should be given to which types of investments should be placed in certain account types. By holding your more active or less tax-efficient investments in retirement accounts, you can protect them from capital gains taxes.
Additionally, placing less actively traded or more tax-efficient investments in taxable brokerage accounts reduce your tax liability since these investments should generate less capital gains and assist in minimizing the tax impact on that account.
As part of your asset location strategy, you should also establish an asset allocation strategy.
However, it is important to recognize that different types of investment accounts are taxed differently and at different time periods. For example:
Taxed-now assets
Liquid and are better suited for current, short-term needs. These assets include savings and checking accounts, certificates of deposit and U.S. Treasury securities.
Taxed-later assets
Generally earmarked for longer-term needs, such as college and retirement funding.
Examples include qualified retirement plans, traditional IRAs, and annuities. Usually, these types of accounts include investments such as stocks, mutual funds, ETFs, and other securities that experience capital appreciation over time.
Investing in real estate is popular because of the benefits of tax deductions, write-offs, favorable capital gains tax treatment, and other potential benefits
Never-taxed assets
Generally offer preferential income tax treatment on the accumulated value and its distribution.
They can include Roth IRAs, Roth 401(k)s, municipal bonds, and cash value within the life insurance policy.
In addition, health savings accounts (HSA) contributions are pre-tax. Any earnings you acquire through simple interest or investing are not subject to tax. If the proceeds are used towards qualified medical expenses, the fund is not taxed.
To achieve your retirement goals and beyond, you will need a plan that distributes your investments in a tax-efficient manner, but it is not for everyone or that simple to manage. If you need planning assistance, consult a qualified financial advisor.
