Question for the week: Do you think about or optimize for tax diversification in retirement? For example, are you intentionally diversifying between Roth, pre-tax, and taxable accounts as a hedge against future tax code changes?
I don’t think about it a ton, but I’ve made some small decisions over time related to tax strategy.
My ongoing strategy is to hold all bond funds in my pre-tax accounts. This should limit their growth, so I won’t pay as much income tax on their withdrawal. It also reduces tax drag from the payouts, since they aren’t held in a taxable account. Alternatively, I hold exclusively stock funds in my Roth. This will prevent being taxed on the higher gains, hopefully.
Another somewhat major choice I made (one time only) was to covert a former 401k to my Roth IRA after I quit that job to go back to school. Since I’d only made something like $14k that year, it made sense to take the “tax hit” that year as opposed to waiting until retirement.
Overall, we are fairly diversified between accounts. It helps that my spouse exclusively contributed to a Roth 401k until we got married and I forced them to switch to Trad so our income wouldn’t be too high for Roth IRA contributions. I have a Trad IRA and my 401k will only accept rollover money, so a backdoor Roth is not a great option for me.
We’re in a high enough tax bracket that I struggle to envision a scenario where we’re not better off maximizing what pretax spaces we have right now. That said we also make backdoor and megabackdoor Roth contributions and have a sizable taxable brokerage balance. It wasn’t by design but we’ve ended up with a good split across each bucket.
Question for the week: Do you think about or optimize for tax diversification in retirement? For example, are you intentionally diversifying between Roth, pre-tax, and taxable accounts as a hedge against future tax code changes?
I don’t think about it a ton, but I’ve made some small decisions over time related to tax strategy.
My ongoing strategy is to hold all bond funds in my pre-tax accounts. This should limit their growth, so I won’t pay as much income tax on their withdrawal. It also reduces tax drag from the payouts, since they aren’t held in a taxable account. Alternatively, I hold exclusively stock funds in my Roth. This will prevent being taxed on the higher gains, hopefully.
Another somewhat major choice I made (one time only) was to covert a former 401k to my Roth IRA after I quit that job to go back to school. Since I’d only made something like $14k that year, it made sense to take the “tax hit” that year as opposed to waiting until retirement.
Overall, we are fairly diversified between accounts. It helps that my spouse exclusively contributed to a Roth 401k until we got married and I forced them to switch to Trad so our income wouldn’t be too high for Roth IRA contributions. I have a Trad IRA and my 401k will only accept rollover money, so a backdoor Roth is not a great option for me.
We’re in a high enough tax bracket that I struggle to envision a scenario where we’re not better off maximizing what pretax spaces we have right now. That said we also make backdoor and megabackdoor Roth contributions and have a sizable taxable brokerage balance. It wasn’t by design but we’ve ended up with a good split across each bucket.