For all the gyrations over complicated financial strategies and products, one of the best methods to accomplish goals is through the use of “buckets”. That is, organizing savings into tax-deferred (retirement plan accounts) and taxable (dollars invested after taxes) accounts in order to increase long-term flexibility. Sometimes this may mean opting to “personalize“ rather than “maximize” some of your savings.
Oftentimes, we see well-intentioned clients who have saved in only one “bucket” (usually the tax-deferred one), because they have been focused on maximizing tax deferred savings before anything else. That is fine, except in many cases the reality is that is where the savings stop.
We see far too many investors that have a big house (with a big mortgage – or even worse two big houses/mortgages); $1 Million in their 401-k or other retirement account; $14.11 in a checking account and a desire to retire…hopefully next week if possible! The glaring problem here is the almost total lack of flexibility in terms of planning since all of the retirement income will be derived from a single source. The recent proposal as part of President Obama’s Budget where retirement accounts might be capped or taxed is an instant” shot across the bow” for those that have everything invested in tax-deferred accounts.
Contrast this with a client that has a split between tax-deferred and taxable accounts. At least there are opportunities to manage income, some of which may be taxed at more favorable capital gain rates versus the full ordinary income from the retirement plan. There may even be years where losses can be matched with gains to further mitigate income taxes.
Saving and investing simultaneously in different account “buckets” might be one of the easiest, underutilized financial/tax strategies available to investors. With constantly changing tax structures, it is a very safe bet on your financial future.