Pre-Tax Vs. Post-Tax Retirement Planning

You will need more income during retirement to “live” than you need to “live” during your working years. This doesn’t even take into account what the tax rates will be in the future as it is very unlikely that they will “stay the same”. As such, you can no longer take for granted that you will be in a lower tax bracket at retirement given these circumstances:

• Significantly FEWER tax deductions at retirement

• Inflation causes you to need more income to maintain your standard of living

• Potential higher tax rates in the future

The fact is that most people are max funding their 401(k) and IRA retirement plans with less emphasis on tax-free alternatives – i.e. Roth IRA and considerably less emphasis on Non-Qualified planning. The result is that the majority of their retirement income coming from their 401(k) or other “Qualified Plans” will be taxed at their “ordinary” “marginal” tax rate – triggering potential major taxation of their Social Security benefits – resulting in higher income tax levels.

Instead of having most of your money in tax-deferred accounts – diversify your investment vehicles so that at retirement you have 3 Buckets to take money from:

• Bucket #1: Tax Deferred – taxed as ordinary income

• Bucket #2: Non-Qualified – taxed mostly at long-term capital gains rates

• Bucket #3: Tax-Free – this money is, of course, TAX-FREE

If you, at retirement, have this “3 Bucket” configuration in place you can “blend” your income, meaning you can take distributions from the “3 Buckets” to ensure the lowest income tax bill possible. The “3 Bucket” Income Diversification concept affects not only income taxes but also:

• Taxation of Social Security benefits

• Tax-deferred account balances

• Distributions to your children

• Accumulated assets at life expectancy

The absolute most important thing you can do to have a positive impact on your financial freedom is to maximize your investment plan and make sure the money is working hard for you and not Uncle Sam!