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Use “Tax Diversification”
to Help Manage
Retirement Income
Y
assuming you meet the Roth’s income guidelines. This allows you
to benefit from both the tax deductions of the traditional IRA and
the potential tax-free distributions of the Roth IRA.
And once you retire, this “tax diversification” can be especially
valuable. Why? Because when you have money in different
types of acc ounts, you gain flexibility in how you structure
your withdrawals — and this flexibility can help you potentially
increase the amount of your after-tax disposable income. If you
have a variety of accounts, with different tax treatments, you
could decide to first make your required withdrawals (from a
traditional IRA and 401(k) or other employer-sponsored plan),
followed, in order, by withdrawals from your taxable investment
accounts, your tax-deferred accounts and, finally, your tax-free
accounts. Keep in mind, though, that you may need to vary your
actual sequence of withdrawals from year to year, depending on
your tax situation. For example, it might make sense to change
the order of withdrawals, or take withdrawals from multiple
accounts, to help reduce taxes and avoid moving into a different
tax bracket.
Clearly, tax diversification can be beneficial. So after
consulting with your tax and financial advisors, consider ways
of allocating your retirement plan contributions to provide
the flexibility you need to maximize your income during your
retirement years.
Edward Jones, its employees and financial advisors cannot provide
tax or legal advice. You should consult your attorney or qualified tax
advisor regarding your situation.
This article was written by Edward Jones for use by your local
Edward Jones Financial Advisor.
ou need to save and invest as much as possible to pay for the
retirement lifestyle you’ve envisioned. But your retirement
income also depends, to a certain degree, on how your
retirement funds are taxed. And that’s why you may be interested
in tax diversification.
To understand the concept of tax diversification, you’ll need
to be familiar with how two of the most important retirement-
savings vehicles — an IRA and a 401(k) — are taxed. Essentially,
these accounts can be classified as either “traditional” or “Roth.”
When you invest in a traditional IRA or 401(k), your
contributions may be tax deductible and your earnings can grow
tax deferred. With a Roth IRA or 401(k), your contributions are
not deductible, but your distributions can potentially be taxfree,
provided you meet certain conditions. (Keep in mind, though,
that to contribute to a Roth IRA, you can’t exceed designated
income limits. Also, not all employers offer the Roth option for
401(k) plans.)
Of course, “tax free” sounds better than “tax deferred,” so you
might think that a Roth option is always going to be preferable.
But that’s not necessarily the case. If you think your tax bracket
will be lower in retirement than when you were working, a
traditional IRA or 401(k) might be a better choice, due to the
cumulative tax deductions you took at a higher tax rate. But if
your tax bracket will be the same, or higher, during retirement,
then the value of tax-free distributions from a Roth IRA or 401(k)
may outweigh the benefits of the tax deductions you’d get from
a traditional IRA or 401(k).
So making the choice between “traditional” and “Roth” could
be tricky. But here’s the good news: You don’t necessarily have
to choose, at least not with your IRA. That’s because you may
be able to contribute to both a traditional IRA and a Roth IRA,
Matt
Dudkowski,
AAMS® | Financial
Advisor | 1007 Mt Royal Blvd. Pittsburgh, PA 15223 | 412.487.3300
Matt
Dudkowski,
AAMS®
[email protected]
| www.edwardjones.com
Financial Advisor
.
Matt
Dudkowski
has been
1007
Mt Royal
Blvd a financial advisor with Edward Jones since 2002, serving individual investors in
the
Pittsburgh
area
from
his Shaler Township office. In January of 2015, Dudkowski accepted an invitation
Pittsburgh, PA 15223
to 412-487-3300
become a limited partner with the firm.
Since joining Edward Jones, Dudkowski has obtained the professional designation of AAMS®. Prior to Edward
Jones, Dudkowski, as a CPA, worked at the H.J. Heinz Company, and at Ernst & Young LLP.
He currently serves on the board of directors for Keystone Wellness Programs, a local nonprofit organization.
A native of Butler County and a graduate of the University
of Notre Dame, Dudkowski resides in Gibsonia with his wife,
two sons and daughter.
Matt Dudkowski has been a financial advisor with Edward Jones since
2002, serving individual investors in the Pittsburgh area from his Shaler
Township office. In January of 2015, Dudkowski accepted an invitation to
Shaler | Summer 2017 | icmags.com 11