In this episode, Alex and Wade discuss tax-efficient retirement strategies, specifically focusing on tax diversification. They explain the three broad types of tax treatments in the tax code: taxable accounts, tax-deferred accounts (such as IRAs and 401ks), and tax-exempt accounts (such as Roth IRAs). They highlight the importance of having assets in each category to provide flexibility in retirement planning. They also discuss the characteristics and advantages of each type of account, including tax treatment, liquidity, and growth potential. Additionally, they touch on the different methods of tracking cost basis in taxable accounts. In this conversation, Alex and Wade discuss tax-efficient retirement distribution strategies. They cover the different types of retirement accounts, including tax-deferred accounts (such as traditional IRAs and 401(k)s), tax-exempt accounts (such as Roth IRAs and Roth 401(k)s), and taxable accounts. They explain the tax advantages and disadvantages of each type of account and discuss the importance of considering your current and future tax rates when deciding where to contribute. They also touch on the backdoor Roth contribution strategy and the concept of required minimum distributions (RMDs). Overall, the conversation emphasizes the importance of tax efficiency in retirement planning.

Takeaways

• Tax diversification involves having assets in taxable accounts, tax-deferred accounts, and tax-exempt accounts to provide flexibility in retirement planning.


• Taxable accounts are the least tax-efficient but offer advantages such as preferential income treatment, step-up in basis at death, and liquidity.


• Tax-deferred accounts, such as IRAs and 401ks, offer tax deductions on contributions and tax-deferred growth, but have required minimum distributions and early withdrawal penalties.


• Tax-exempt accounts, such as Roth IRAs, offer tax-free growth and tax-free distributions, but contributions are not tax-deductible.


• Tracking cost basis in taxable accounts can be done using methods like average cost, first in first out (FIFO), or specific identification of tax lots. Consider your current and future tax rates when deciding where to contribute to retirement accounts.


• Tax-deferred accounts (such as traditional IRAs and 401(k)s) provide a tax deduction now but are taxed upon withdrawal.


• Tax-exempt accounts (such as Roth IRAs and Roth 401(k)s) are funded with after-tax dollars but provide tax-free withdrawals in retirement.


• Taxable accounts have no tax advantages but offer flexibility and liquidity.


• The backdoor Roth contribution strategy allows high-income earners to contribute to a Roth IRA by making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA.


• Required minimum distributions (RMDs) are mandatory withdrawals from tax-deferred retirement accounts starting at age 72 (or 70.5 for those born before 1960).


• Tax efficiency is an important aspect of retirement planning and can have a significant impact on your overall financial situation.

Chapters

00:00 Introduction and Excitement for Tax-Efficient Retirement Strategies

01:26 Tax-Efficient Retirement Distributions as a General Theme

03:01 Understanding Tax Diversification and the Three Types of Tax Treatments

04:20 Advantages and Considerations of Taxable Accounts

15:11 Benefits and Limitations of Tax-Deferred Accounts

25:14 The Advantages of Tax-Exempt Accounts

26:04 Methods of Tracking Cost Basis in Taxable Accounts

00:31 Overview of Retirement Accounts

08:43 Tax-Deferred Accounts

18:30 Tax-Exempt Accounts

25:14 Taxable Accounts

28:47 Backdoor Roth Contribution

33:44 Required Minimum Distributions (RMDs)

38:26 Tax Efficiency in Retirement Planning

45:11 Retirement Tax Cliff

47:09 Conclusion

Links

The Retirement Planning Guidebook: 2nd Edition has just been updated for 2024! Visit your preferred book retailer or simply click here to order your copy today: https://www.wadepfau.com/books/ 

This episode is sponsored by McLean Asset Management. Visit https://www.mcleanam.com/retirement-income-planning-llm/ to download McLean’s free eBook, “Retirement Income Planning”