Understand How Your Retirement Assets Are Taxed

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Too many people overlook one big factor in planning for retirement – tax planning.

When you think about retirement, you’re probably daydreaming about how you’ll spend your newfound free time and strategizing about saving to get to those goals. However, saving isn’t the only ingredient in the recipe for retirement success. Incorporating tax planning into your retirement strategy is critical for ensuring you have saved enough to live the life you’ve dreamed.

That being said, tax planning for retirement can be complicated – it involves looking at both your current financial and tax situation as well as anticipating what your finances will look like in the future. Working with a financial advisor can provide valuable guidance on how to plan for taxes on your retirement assets today and in the future so you know you’re on the right path.

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Retirement Asset Diversification

You are likely already aware of the value of diversifying retirement assets when it comes to securing your savings from the pitfalls of putting all of your eggs in one basket.

Retirement asset diversification is also crucial when it comes to reducing your tax liability and getting the most out of your savings. By setting up multiple retirement income sources, each with a different tax treatment, you’ll be better equipped to pivot with your income needs in retirement, without subjecting yourself to a higher tax bill.

There are the three kinds of taxation you’ll need to think about when it comes to your retirement assets: taxable, tax-deferred, and tax-free.


Taxable retirement assets are those which can be taxed at normal income tax rates. Being taxable doesn’t mean these aren’t important sources of income, just that you need to plan for paying taxes on this kind of income when you make your retirement plan.

Here are a few of the most common kinds of taxable retirement assets:

·      Pension income is taxable unless it is generated by certain kinds of military or disability pensions. Your pension provider will tell you each year how much of your pension is taxable. Taxes on pension income also vary widely depending on the state you reside in, so if your pension is a large part of your retirement assets, you’ll want to check your state laws as well.

·      Social Security benefits are taxable, depending on how much retirement income you have and whether you’re filing joint or separate tax returns with a spouse. You might need to pay taxes on 50-85% of your Social Security benefits, depending on your income level.

·      Investment income in your non-retirement accounts, from interest, dividends, and capital gains, will be taxed as you earn it as well. It is possible to pay capital gains rates on this income, which are lower than ordinary income tax rates, if the asset is held for more than a year.


Tax-deferred accounts provide immediate tax relief on your contributions. However, you will need to answer for these taxes when you make withdrawals in retirement.

Because you’re essentially deferring taxes to a later date, as the name suggests, these kinds of accounts are valuable if you think you’ll be in a lower tax bracket at retirement than you are at the time of contributions, which is the case for many people, especially high-earners. 

The most common kinds of tax-deferred retirement accounts are traditional 401(k) plans and traditional IRAs. Many retirement savers pick these kinds of assets to contribute to because they give you the immediate advantage of reducing your tax burden in the current year.

If you’re currently earning a high salary and want to reduce your taxes owed this year, contributing to these accounts can help. Just remember when you’re deciding how much you need to save for retirement that you need to take into account the taxes that you’ve deferred, as you’ll owe them once you begin to make withdrawals.


Tax-free accounts don’t provide a tax benefit when you’re making contributions to them – but they provide tax-free withdrawals in retirement. Your investment returns in these kinds of accounts grow tax-free, and your tax burden in retirement will be lower overall with them.

The most popular types of tax-free accounts in the US are Roth IRAs and Roth 401(k)s. You won’t get any reduction in your taxes today from the contributions you make to these kinds of accounts, unlike taxed or tax-deferred accounts, but you also won’t need to pay taxes upon retirement on your funds and gains either.

These accounts can be especially useful when making contributions during leaner income periods. Additionally, they can be indispensable in retirement. Suppose, for instance, that in retirement you are saddled with a significant and unexpected expense at the end of the year. You have already withdrawn enough income throughout the year to place you at the top of your intended tax bracket. Withdrawing additional taxable income to cover this expense will tip you into a new bracket and raise your tax bill. But because you have a Roth IRA, you are able to withdraw the funds to cover the expense without increasing your tax liability.

Picking the Right Mix of Retirement Assets

Many of the best savers end up with an assortment of retirement accounts as a means of finessing contribution limits. What you may not realize is that pursuing multiple accounts can result in tax diversification that is critical to a tax efficient retirement plan. Using more than one type of asset to save for retirement can mean maximizing the benefit to your savings both now and down the road when you retire.

To determine which accounts are most appropriate for your savings, you’ll need to consider your current income and tax situation, your income goals, and your anticipated tax bracket in retirement. You’re going to pay taxes on your retirement assets at some point – so determining how much of your savings to allocate to the three different categories of tax treatment is about picking the timeframe that works for you.

Advanced Retirement Strategies and Your Retirement Tax Plan

Planning all of this on your own can be overwhelming, since there are so many complicated factors to consider. That’s why working with a financial advisor can provide the help and guidance you need to make the right choices today to save for your dream retirement. They can help you pick the retirement assets and investments that make sense for you both today and in the future, so your savings go farther.

The financial advisors at Advanced Retirement Strategies have decades of combined experience helping clients transition into retirement. Using sound investment strategies, extensive social security knowledge, and calculated tax strategies, Advanced Retirement Strategies provides resources and services to residents of Bountiful, Utah and the surrounding area who are eager to make the most of their retirement years.

If you are within ten years of retirement and have over $250k in assets, click here for a free retirement review from Advanced Retirement Strategies to gauge the efficiency of your investments, income plan, and tax strategies.

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