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Leverage These 5 Retirement Tax Diversification Strategies

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When you’re depending on your savings to do the heavy lifting in retirement, you need to wring out as much income as you can from every dollar of savings. However, if most of your savings are in tax-deferred accounts, you’ll end up sharing your windfall with Uncle Sam in the form of taxes on your retirement distributions.

Those taxes cut into your income by anywhere from 10% to 37%, depending on your tax bracket, where you live and your investment strategies. That means that the $500,000 that you have saved, is actually not $500,000 — rather, you must discount it by how much you’ll owe the federal, state and local governments each and every year that you take retirement distributions.

Early in your retirement, this isn’t a big issue, because you don’t have to take distributions from your tax-deferred accounts unless you want to. That changes when the IRS requires you to begin taking required minimum distributions (RMDs) based on your life expectancy and tax-deferred account balances. RMDs used to kick in at age 70.5, but the recent passage of the SECURE act has now raised that to age 72 for everyone born on July 1, 1949, or later. The age remains at 70.5 for everyone born before that.

Fortunately, there are strategies that enable you to create tax diversification in your retirement savings accounts. These strategies are best employed as early as possible — decades, or at least years, before you retire. However, even if you are only a few years away from required minimum distributions, there’s still time to mitigate your retirement tax bill.

After toiling at a factory for 35 years, my dad retired at age 55 when his employer closed the factory and headed to the land of cheaper labor. He was a man of simple means and had no issues taking an early retirement because his defined benefit pension and Social Security would support him until the day he died.

That is how retirement worked for millions of Americans. But we now have moved into an age of the New Retirement. The defined benefit pensions of yesterday are as elusive and rare as the Northern........

© Kiplinger