Why you should spread your retirement savings across multiple accounts. Here why | personal financing

(Adam Levy)

There are a variety of accounts available to most investors to save for retirement. You can choose the traditional 401(k), IRA, or Roth versions of those accounts, or stick with a regular taxable brokerage account. You can even use a tax-free HSA to save for retirement.

If you are planning for the long term, i.e. necessarily retirement planners, then it is better to spread the money to all these accounts than to pile them in one account. Doing so will provide the greatest flexibility for your savings while providing the greatest opportunity for Keep your taxes low in retirement.

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control your income

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If you can avoid paying more taxes than you need in retirement, you can withdraw a smaller portion of your wallet or spend more of your savings each year. In order to avoid taxes, you should be able to control your taxable income as much as possible.

All withdrawals from a traditional (before tax) or 401(k) IRA count toward your income. But withdrawals from a Roth (tax-exempt) account don’t count at all. Likewise, HSA (tax-free) withdrawals do not count toward qualifying medical expenses. Furthermore, only gains from investments in taxable accounts affect your adjusted gross income.

By combining withdrawals from pre-tax and tax-exempt accounts, you’ll be able to practically determine your taxable income in retirement. You can keep your taxable income at $0 by only making withdrawals from your pre-tax accounts up to the level of your deductions.

You may also be able to benefit from capital gains in your taxable account with no tax liability by staying under the 0% threshold. Capital gains tax rate. For 2022, that limit is taxable income of $41,675 for individuals and $83,350 for couples who file jointly. Remember, these are gains that add up to the principal investment, so you can potentially withdraw a lot from your taxable account without incurring any tax bills.

If you have scope to reap capital gains at a 0% tax rate, you don’t have to think about doing so. Even if you don’t need funds for your budget, by selling and buying back shares right away, you can raise the cost basis of your investments, reducing potential taxable gains in future years. This is a strategy called tax gain harvesting.

Make the most of every account

If you have a diversified portfolio of stocks, bonds, and other assets, you can take advantage of your different accounts.

Since a Roth account requires you to pay taxes on your contributions or transfers, but withdrawals are tax-deductible, they are best suited for investments with the greatest potential for growth. stocks in particular growth stocksIt’ll be right at home in Roth’s account.

If you have dividend-payers or bonds that pay interest regularly, you may get the most out of keeping it in a pre-tax retirement account. Since all taxes are deferred in these accounts, you won’t see a tax bill on dividend and interest payments each year, and you can keep more of your invested money.

And if you have investments with tax benefits like real estate investment funds Or MLPs, you can keep them in a taxable account (although they’d be fine in a retirement account, too). municipal bondswhich can be tax deductible, are great options for a taxable account as well.

The accounts in which you own each type of asset can have a significant impact on the value of your after-tax portfolio at retirement.

By holding assets across all types of accounts, you can increase your savings and how much of that savings you get to keep in retirement.

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