Tax Diversification Planning

Striking a Balance

One of Benjamin Franklin’s most famous quotes states, “Nothing is certain in life but death and taxes.” That is still true today. Now, we are all for paying what we owe. But let’s face it: Uncle Sam is not good with money, so why give him more than we should? That is the key to tax diversification planning.

This type of planning is a delicate balance between whether we pay taxes today, tomorrow, or don’t pay taxes at all. Different types of investments have different tax treatments, so it is a good idea to know what those are and how to use them. Think of it this way: if you open up a toolbox, there are a variety of different tools. If you use only a hammer for every job, you are not going to get very many jobs.

The same thing can be said about tax diversification planning: you need a tax-deferred bucket of money like a 401(k) or IRA; you also need a taxable bucket like a checking account; and you need a tax-exempt (tax-free) bucket like a Roth account or high-cash-value life insurance (this is the type of life insurance you use while you are still living). Having the correct balance in each of these types of accounts can make a huge difference in how much money you take home at the end of the day.

Fine-Tuning Your Plan

But that balance is specific to everyone. Small business owners may not know how to acquire a tax-deferred account, while an employee at a large company may not know how to acquire a tax-exempt bucket. And once you know how to acquire these buckets, how much do you put into each of them?

If you are nearing retirement, how you handle each of these buckets can determine if you have enough money to survive 30+ years of retirement or if you end up still working in your 70s. There are a lot of dangers in retirement if your buckets are out of balance, and they come in the form of required minimum distributions, changes to the tax code, or penalties for touching your money too soon because you retired earlier than you thought you could.

So, if you feel as though you are paying too much in taxes or you just want to know if your current plan will really meet your goals, give us a call and we can discuss an individualized plan made just for you. The call and the information are complimentary to you.

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