Take taxes. You can’t dictate tax policy, but you may at least be able to hedge against future rate hikes by engaging in a bit of “tax diversification”that is, spreading your retirement savings around so that you have money in a variety of accounts that receive different tax treatment.
Traditional 401(k)s and IRAs hold mostly or exclusively pretax dollars that are taxed at ordinary income rates when you withdraw them. If you’ve got your entire nest egg in such accounts, a hike in ordinary income tax rates could leave you with significantly less after-tax spending cash in retirement.
But qualified withdrawals from Roth accounts are tax-free. So if you also have some savings in a Roth 401(k) or Roth IRA, that money wouldn’t be hit by the higher tax on ordinary income. Similarly, tax-free withdrawals from Roth accounts don’t count in determining whether any of your Social Security benefits are taxable. So a Roth may be able to give you some wiggle room on that score as well.
–
Walter Updegrave is the editor of RealDealRetirement.com, a site that offers easy-to-understand advice on retirement planning. Walter was previously an editor at MONEY Magazine and wrote the Ask the Expert column for CNNMoney.com. Walter has written four books on retirement planning and investing, including We’re Not in Kansas Anymore: How to Retire Rich in a Totally Changed World.
Follow him @RealDealRetire or if you would like to ask him a question, send it to walter@realdealretirement.com.
Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2015 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2015. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2015 and/or its affiliates.
