Taxes in Retirement

What are you doing to create tax-free income in retirement?

Asset Location vs. Asset Allocation. While the concepts may sound similar, they are entirely different.

Asset Allocation is utilized by investing in different asset classes to reduce your investment risk. It is defined as the combination of asset classes in your portfolio, such as stocks, bonds, and cash.

Asset Location is utilized by investing in different tax locations to reduce your tax liability risk. It is defined as the combination of portfolio holdings and tax treatment when you withdraw your assets.

Investment allocation, reallocation, and rebalancing addresses the risks in the portfolio. Asset location focuses on the risk of taxation on distributions.

Why You May Need An Asset Location Plan

Without Asset Location Planning

In example 1 below, the Smiths just retired and need to pull $350,000 from their investments this year to maintain their lifestyle. If the Smiths had never done an asset location plan, they may not have been investing in all three locations during their working years, which means they may only be able to pull their retirement income from one location, the ordinary income location (which is typically a 401(k)). In this case, they would end up paying $72,551 in taxes, based on current tax treatment.

Efftive Tax Rate = 21%

With Asset Location Planning

In example 2 below, the Smiths met with ClearPoint Wealth Advisors and, based on their asset location plan, determined an opitmal mix of investment locations. Since they had been investing in all three locations, they have the option to pull their $350,000 from all three locations. In this case, they can take $150,000 from the ordinary income location, $100,000 from the capital gains location, and $100,000 from the tax-free location.

Effective Tax Rate = 11.2%

Total Tax Savings with Asset Location Planning = $33,317 (45.9)%

By determining their tax rates, finding the ideal tax locations, applying and tax bracket planning, the Smiths were able to reduce their effective tax rate from 21% to 11.2%. That's a tax savings of 45.9%, a total of $33,317. This allows them to spend that money on their grandkids, travel and adventures, golf, and anything else they love doing!

Of course, this is just a hypothetical example -- with your personalized asset location plan, you'll be able to determine how best to potentially reduce your taxes based on your income and investments.