In our prior post we covered the three tax environments in which your investments live.  Tax-diversification is the act of managing these environments as you accumulate wealth today and also as you distribute income tomorrow.  Problems may arise when your approach focuses solely in one environment without considering the others.

Here are some questions to ask yourself when selecting the right tax environment, both today and tomorrow, for your investments.

  • How long do I plan to work before repurposing my time? Investments in a pre-tax environment must begin to be removed by age 72 when placed in an IRA.  Forecasting current pretax values into the future may provide an estimate on what to expect.  Roth IRA environments don’t have this required distribution and may offer more planning flexibility as well as acting as a counterbalance to pretax investing.


  • Do I anticipate being in a lower tax bracket at retirement, or could it be higher?


  • Are you investing in an after-tax capacity now? If so, how did you go about selecting your investments to minimize your capital gains each year?


  • How does the taxation of social security benefits and your increased tax bracket impact your future income? How might Roth or after-tax investing compliment your plan?


  • How much would you like to leave to family and charities that are important to you? What tax implications might this have to those who are fortunate enough to inherit your financial legacy?


  • What’s the tax impact to converting pre-tax investments to Roth and its integration with future Medicare premiums?

Remaining flexible is key as we can be fairly certain that taxes are likely to change every few years.  This may allow you to avoid reacting and help you keep focused on the inputs that you can control, which are vital to long-term success in financial planning.

What is tax diversification? – Part 1

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