Do You Understand the Three Tax Categories of Your Retirement Plan
Understanding the Three Tax Categories for Retirement Planning
When it comes to planning for retirement, your portfolio can fall into three different tax categories: tax-free, tax-deferred, and taxable. Understanding these categories helps you make informed financial decisions and optimize your tax strategy for retirement.
The Three Tax Buckets
- Tax-Free – This is the most favorable category because you won’t pay taxes on this money today or in the future. Examples include Roth IRAs and certain types of life insurance policies.
- Tax-Deferred – This category allows you to delay paying taxes until you withdraw the money. Common examples include traditional IRAs, 403(b)s, and 401(k)s.
- Taxable – Investments in this category are taxed annually based on earnings. This includes brokerage accounts, stock investments, and investment properties.
Assessing Your Current Retirement Plan
When working with clients, we must start by identifying where your money is currently placed. Most people have the majority of their assets in tax-deferred accounts like a 401(k) or IRA. However, diversifying across different tax buckets can provide more financial flexibility in retirement.
Bonnie Clark is a financial planner in Surprise, AZ, specializing in retirement planning, life insurance, and annuities. She offers personalized solutions to help clients achieve financial security. Read the blogs to stay updated on the latest financial tips.
