Through investment planning for retirement in Minneapolis, MN, you may be able to increase your wealth by creating an action plan for strategically withdrawing funds from your retirement accounts. The order in which you choose to withdraw your distributions and the type of investment accounts you choose to draw from are important considerations in minimizing your tax burden.
Reducing Taxes
If you wish to reduce your taxes, it is crucial to consider the type of account you are withdrawing funds from in addition to your current and expected future income tax brackets. Should you access your tax-deferred account or taxable account first? Or should you develop a blended approach utilizing partial Roth conversions—moving a portion of funds from a traditional IRA to a Roth IRA —while withdrawing some funds from your taxable account?
For example, by reducing the amount of an IRA through partial Roth conversions, you will decrease the RMDs (Required Minimum Distributions) and corresponding future income taxes that you will incur. It’s like getting a head start in paying income tax on your IRA withdrawals. As partial Roth conversions will generate taxable income, it is strategic to do them when you believe your income tax will be lower, to avoid falling into a higher income tax bracket.
Decide Your Risk Level
Different types of investments have different levels of risk. It is important to determine the risk capacity and the risk tolerance you have. Risk capacity is the amount of risk you are able bear without jeopardizing your financial stability and risk tolerance is the amount of risk that feels comfortable, therefore subject to emotions. Work with your investment consultant to find an asset allocation model that is appropriate for your situation. Some of the various asset classes consist of equities (stocks), fixed income (bonds), and alternative assets such as real estate and commodities, each associated with pros and cons.
