Save Income Tax: Take Another Look at Your Nest Egg 

For many of us, our “retirement savings” are in tax-deferred investments, such as IRAs and 401(k)s, that will grow tax free until we use them as income in retirement. But as laws change and government entitlements loom large, it’s time to re-examine the wisdom of putting all our nest eggs in a tax-deferred basket.

In a Changing World, You Need a Tax Strategy

The long-held rationale for investing in tax-deferred retirement funds assumes that when you retire, your tax rate will decrease because you’re not earning a salary any more.  If that assumption holds true, tax deferral allows you to invest more dollars, with compounded growth, and pay lower taxes in the end.

Tax deferral may not work that way in the current environment.  Today’s tax rates are historically low, and could as easily increase as decrease in the future, with looming issues like the federal deficit, Social Security and Medicare. If tax rates increase, having all your retirement savings in tax-deferred traditional IRAs or 401(k) plans could mean you’ll pay more in taxes, rather than less, when those funds are distributed down the road.

Adapting to this new landscape means you need a financial security plan that incorporates a tax distribution strategy as well as strategies for managing risks and accumulating assets to meet your long-term financial needs. To create a flexible income distribution plan in retirement, your assets must be invested not just based on risk tolerance and overall financial goals, but also with an understanding of  the tax attributes of the financial vehicles, which are chosen to help you minimize your tax burden over the long term.

Working with Northwestern Mutual’s personal planning analysis tools, a financial representative can help you create a plan that will work best for your particular situation and goals.

A financial representative will determine the best mix of vehicles for investing your assets, including tax-deferred vehicles such as traditional IRAs, 401(k) plans or annuities; and vehicles that allow assets to grow and be distributed tax free, such as life insurance, Roth IRAs and Roth 401(k) funds.

A financial representative will work with you and your tax advisor as needed to make recommendations based on the following considerations:

  • Amount of Income
    Your plan will take into account the income you are generating today and the amount of income you anticipate having in the future from all sources, including investment returns, inheritance, pension, Social Security, IRA and qualified plan distributions, and the sale of a business or other property.

  • Timing of Income
    By having a well-diversified portfolio, you can choose the timing of distributions from various income sources to minimize the overall tax impact.

  • Your Possible Tax Rate
    The taxes you pay depend on your income as well as your tax deductions, which may be different today than in the future. For example, if your home is paid for you would no longer have a mortgage interest deduction.  Location also impacts the state income taxes you pay, as retirees will often move to warmer climates, or relocate to be nearer to their children or grandchildren.

You can’t predict the future but you can plan for it with a financial security plan that not only helps you manage risks and accumulate funds but also includes a tax strategy for your income stream in retirement. A financial representative can help you develop the plan that addresses all of these financial aspects of retirement.