How to Retire from a Large Corporation # 13: Organizing Investments by Tax Status

This blog is the 13th in a series, “How to Retire from a Large Corporation” and is designed to accompany an e-book by the same name.

Previously, we have explored strategies to consider to help you make the best decision with your pension. Today, talk about the importance of organizing your investments by their tax status. When you do this, you will position yourself to make better decisions so that you do not get hammered with taxes when you take them as income.

All too often, investors and retirees pay too much in taxes because they do not know how to draw down their accounts efficiently, or they do not understand how much control they actually have.

Here is what you should do: Take a step back and look at your investments. Divide them into four buckets:

• Pre-Tax IRAs and Traditional 401(k)s - this money will all be taxed when withdrawn (or converted to Roth)
• Roth IRAs and Roth 401(k)s - this money should all come out to you tax-free
• After-Tax Investment Accounts - you will likely pay dividends and capital gains along the way with this type of account, and you may pay a capital gain when you sell your investments
• Checking and Savings - you will pay interest as ordinary income as it is earned

Before you design your withdrawal strategy, you need to break down your accounts in these four categories, and also know how much risk you are taking in each type of account. 

For instance, many times we recommend that investors take money out of Roth accounts later as a way to hedge against higher taxes down the road. Perhaps the Roth money should be more aggressive than your other accounts. Also, stock funds are often more tax-efficient than bond funds, so many people would benefit by “overweighting” stocks in their after-tax accounts, and “underweighting” them in their pre-tax accounts. Before you can craft a plan you must understand how each type of account is taxed, and also the purpose of each account.

But what if you are still many years away from retirement? Great! You have the luxury of time. Now is the time to decide how much you should be saving into each of these buckets so that you will be in a better position when you draw them down later.

You have much more control over taxes than you think you do. Plan wisely!

Check back next time as we explore rates of withdrawal. How much should you draw from your retirement accounts each year? Thank you for reading! To download the full “How to Retire from a Large Corporation” eBook you can find it here.

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This is the 13th of many blogs we are writing to help you finish strong in life. Much of the content is pulled from an eBook we wrote entitled “How to Retire from a Large Corporation.” Click here to download the document. If you would like to discuss any of these topics in more detail, you can schedule a time to talk through this link.