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VOL. 129 | NO. 70 | Thursday, April 10, 2014

Dana and Ray Brandon

Diversify to Help Your Taxability

By Ray and Dana Brandon

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Ray’s Take: Planning for the tax portion of your retirement can have an important impact on the longevity and quality of retirement savings. Various investment and savings instruments are taxed in different ways, so building a pool with different levels can help you with your taxes.

These levels consist of taxable accounts, tax-deferred accounts and tax-exempt accounts, and you should manage carefully the order and percentages for withdrawal.

Taxable accounts are usually securities such as stocks or mutual funds. These are taxed as long-term capital gains if you have held them for a year and a day or more. Shorter holding periods create a different and higher tax bill. But since you have a tax basis, the overall tax is less as a percentage of the distribution amount.

Tax-deferred accounts are the 401(k)s and IRAs we are all familiar with. Maximizing tax-deferred growth is a powerful way to accumulate money on which you do not pay taxes until withdrawal. This allows gains to compound over a long period of time to produce the best increase. But they are 100 percent taxable upon distribution. Depending on your bracket, Roth conversions of a portion of these accounts can be very effective.

Tax-exempt accounts are commonly Roth IRAs or Roth 401(k)s, and withdrawals from these types of accounts are tax-free once you have met the requirements. Additionally, you are not required to take Required Minimum Distributions (RMD) at age 70½ as you are with the traditional 401(k) or IRA.

So what do you do?

Once you’ve determined what you want your retirement income to be, take a look at your portfolio and determine if you have tax diversification in addition to asset class diversification. Creating a withdrawal strategy, that will stretch your dollars and also decrease your tax bill, can make for a happier retirement. Tax policies come and go like presidents and Congressmen. Unless you have a crystal ball, it’s best to have a variety of tax pools from which to draw.

These are just some of the ways to reach diversification. Consult a tax adviser or your financial planner for more information.

Dana’s Take: Teaching your children the importance of saving and thinking about the future from a young age is one of the best inheritances you can give them.

But what if you want to leave them a monetary inheritance in addition to all the wisdom?

When reviewing your retirement portfolio and thinking about taxes, also consider the money you may want to leave to your children or grandchildren and the tax ramifications of the inheritance.

With good tax planning and time, your legacy can fulfill more of your wishes for generations to come.

Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at raybrandon@brandonplanning.com.

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