Tax Diversification to Reduce Taxes Now AND in Retirement

Paying attention to your taxes now AND your taxes later will give you the tax diversification and freedom you’ll want during retirement. A tax-diversified portfolio should be made up of tax-deferred, Roth, and taxable accounts.

In this post from the White Coat Investor, learn about the importance and various methods for thinking of tax now and in the future as you make investment and withdrawal decisions.

How Are Retirement Accounts Taxed?

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The typical physician is taxed at a high marginal tax rate during their peak earning years. As such, we naturally look for tax-deferred retirement accounts that can give us relief from this tax burden, such as 401(k)s, 403(b)s, 457s, profit-sharing plans, and defined benefit plans.

Each dollar contributed to these accounts is a dollar that isn’t taxed now at high marginal rates. Basically, this income is deferred into retirement when we can withdraw at least some of it at lower marginal rates, reducing our overall tax burden.

Roth IRAs were introduced to the retirement landscape in 1997, and a Roth option is commonly found in 401(k)s across the country. Instead of saving taxes now and paying them later, with a Roth retirement account, you pay taxes now and you and your heirs avoid paying income taxes on that money ever again, no matter how large it grows.

Utilizing Roth IRAs and 401(k)s to Reduce Taxable Income

Similar to tax-deferred retirement accounts, Roth accounts also avoid annual taxation on capital gains and dividends. The obvious benefits to the retiree are no RMDs (on Roth IRAs;  Roth 401(k)s still have RMDs unless you’re still working and own less than 5% of the company) and the ability to preferentially take some of their retirement money from a tax-free Roth account rather than withdrawing tax-deferred money at high marginal rates.

Many physicians can save money above and beyond their retirement accounts—whether in paper assets, like stocks, bonds, and mutual funds, or in income-producing assets like real estate or small businesses.

The Taxable Investment Account

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