Retirement planning is one of the most important aspects of any comprehensive financial plan. Individuals are encouraged to start saving early and to be consistent if they want to continue their lifestyle throughout their golden years.
However, just as important as consistency and getting an early start is how you manage your retirement savings. Focusing on where you save your assets and how you withdraw them can dramatically increase your chances of success.
Idaho Medical Association Financial Services is here to help you plan for retirement, whether you’re interested in the most effective strategy for wealth management for physicians in Ada County or you’re just seeking general wisdom on this potentially confusing subject.
Trust us to help ensure that you get the highest after-tax return on your investments through proper asset allocation and withdrawals.
Consider Asset Location
All accounts and investments are not created equal — especially when it comes to tax attributes. Retirement accounts can either be taxable or tax-deferred. Understand the advantages of each by reviewing the infographic below:
You will receive a higher rate of return if you understand the tax attributes of your investment accounts and how to allocate your assets properly.
Tax-deferred accounts ensure that assets will grow tax-free until they are withdrawn. These accounts include IRAs and 401(k)s. Assets with significant tax consequences (such as corporate bond mutual funds) are oftentimes better placed in tax-deferred accounts. Additionally, assets with short-term gains, such as actively-traded stocks, are also a great candidate for tax-deferred accounts.
On the other hand, tax-efficient investments can be placed in taxable accounts. Tax-efficient investments include tax-exempt municipal bonds and stock index funds.
If possible, your highest growth investments should be placed in a Roth account. Because they are funded with after-tax dollars, Roth accounts allow assets to grow tax-free and be withdrawn tax-free.
Order of Withdrawal
Once you understand the tax implications of your different retirement accounts, choosing which account to withdraw from first becomes more straightforward. Generally speaking, it’s better to withdraw from taxable accounts first to give your tax-deferred accounts more time to benefit from their tax advantages. However, these decisions should be informed by your long-term tax situation, as well.
When it comes to a traditional IRA, minimum distributions are required starting the year you turn age 70 ½. Work with a financial advisor to ensure that these distributions do not place you in a higher tax bracket; in these cases, it may be wise to begin withdrawing early or to convert money into a Roth account annually.
Take advantage of the tax-free growth and withdrawals of your Roth IRA by planning to withdraw from that account very last. Tax-free withdrawals also extend to any heirs that inherit your account; thus, withdrawing from your Roth last also ensures that if you leave money behind, you are leaving your heirs a valuable asset.
When it comes to investing for retirement, work with an expert financial planner to ensure proper asset allocation and account withdrawals. At Idaho Medical Association Financial Services, we specialize not only in retirement planning for doctors in Ada County, but also in creating personalized retirement plans that help all of our clients make the most of their investments.