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Balancing Taxes

Managing your tax liability is an essential part of any investment and budgeting plan. Assuming that the objective for most investors is to keep their tax liability to a minimum, balancing your investments between taxable, tax deferred and tax advantaged accounts is an important strategy in your overall financial plan. “It’s always good to have different buckets of money, says Debbie Craig, because then it is easier to manage your taxes in retirement.”

As with most tax related questions the answer is often dependent upon your current, projected and retirement income levels.

Most retirement accounts are tax deferred meaning you pay taxes when you pull the money out of the account at retirement. So the money invested now reduces your current taxable income. If you believe that your taxable income at retirement will be less than your taxable income while you are working, then it is recommended to contribute more to these tax deferred accounts such as your IRA, 401(k) etc. while you are working.

Remember, it is recommended that no matter your income level now or in the future, if your employer has a retirement plan that includes a ‘match’ it is recommended that you contribute at least as much as necessary to earn the match.

If you expect your income to be higher during retirement due to additional income sources such as required minimum distributions (RMDs), pension payments, annuity payments, and social security then from a tax liability perspective it makes sense to put more money into after tax accounts such as general trading accounts and Roth IRAs while you are working.

Of course, there are other factors to weigh in on this such as your age. If you are a Gen Xer or millennial it is most likely beneficial for you to fund your Roth account due to the length of time the account has to grow tax free no matter your income level now or in the future. (To learn more about the advantages of a Roth click here.)

Unfortunately, we cannot always pick and choose how our investments will be taxed because it depends on how the IRS taxes each type of investment. We will work alongside your accountant to personalize your financial plan for you to help you achieve your goals while being mindful of your tax liability.

Remember we are always paying tax – it is just when we are going to pay it.


Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and investors may incur a profit or a loss. Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Raymond James does not provide tax services.