Help Reduce the Tax Impact
Whether you’re just getting ready to enroll in your deferred compensation plan or you’re nearing retirement, one of the key considerations when making decisions about your money is the impact of taxes.
Benefits of participating
Participating in your deferred comp plan means you’re already reducing the impact of taxes on your investments. Deferred comp invests your paycheck contributions pre-tax to potentially grow for you. When your paycheck contributions are taken on a pre-tax basis your taxable income is lower, which means you may avoid being placed in a higher tax bracket.
However, since tax rates are so unpredictable, some financial planners recommend considering a strategy like tax diversification.1
Who knows what tax rates will be in 10, 20 or 30 years from now? Many experts think that up is the only way they could go.2 For this reason, using a tax diversification strategy may help you alleviate tax risk a little more in the long run.
For example, if all of your funds are in a tax-deferred account, you may want to consider paying some taxes now through an option like a Roth 457(b), in case the rates are significantly higher when you retire. Spreading your investment funds between pre-tax and post-tax investment options may help to balance the tax risk in the long run. Talk with a Retirement Specialist to see if your plan offers Roth contributions.*
Managing taxes in retirement
If you’re approaching or already in retirement and you’ve invested consistently to build your retirement savings, the last thing you want to do is pay more taxes than necessary. Withdrawals from many types of retirement accounts are taxed as regular income, so if you withdraw large lump sums, you may move into a higher tax bracket. The goal is to keep money in your pocket for retirement, and reducing taxes could potentially help.
The bottom line
There are no set rules for tax diversification and no guarantee that one particular strategy will work better than another. Investing in different buckets that have various tax implications may help to balance your tax risk over the long-term. Talk with your financial advisor about a strategy to face the tax impact.
Get the help you need
Talk with a Retirement Specialist if you have questions about your plan. Talk to your tax advisor if you have concerns about taxes and their effect on your retirement investments.
1The Importance of Tax Diversification, Jeff Brown, https://www.thestreet.com/story/12805392/1/importance-tax-diversification.html, 03/10/2010
2How to hedge against risk of taxes in retirement, Eileen Ambrose, Chicago Sun Times, 3/11/2011
*Neither Nationwide nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions. Information provided by Retirement Specialists is for educational purposes only and is not intended as investment advice.