Why Two Buckets are Better than One - J.E. Wilson Advisors

Why Two Buckets are Better than One

An important financial planning tool that we strongly recommend is having both tax-deferred and taxable investment portfolios. Very often, when we meet with new clients, they have all or almost all of their retirement savings in tax-deferred accounts. Since the tax code encourages this, it is not unexpected. Ultimately, however, this presents a planning problem since it limits cash flow flexibility because all the resources are fully taxable when they are withdrawn.


Wise Tax Planning for Retirement

Try thinking about your investment resources as “buckets” where savings are deposited. While it is a good strategy to take advantage of pre-tax savings via 401(k)s and similar plans in the “retirement plan bucket,” it is also crucial to save after tax in the “liquidity bucket.” This “liquidity bucket” will come in handy when planning tax-deferred retirement plan distributions. Having this resource allows for good tax planning between the fully taxable source (retirement plan account), and the low/no tax account (“liquidity bucket”).

Investing intelligently is about understanding and controlling the investing elements that actually can be controlled. While you can’t control the tax rates, you certainly can control the timing and type of tax (more favorably taxed capital gains versus ordinary income) with a “liquidity bucket.” Also, if unexpected needs arise, the “liquidity bucket” is often the most desirable funding source. If all your financial resources are in retirement plans, this option simply does not exist.

Personal financial planning is primarily about possibilities. Investment returns, tax rates, spending needs, and legacy goals are all part of the equation. It is easier and more efficient to formulate a planning strategy with flexibility at the core. The overarching theme of our planning process is to improve the circumstances of our clients. Ready for a real conversation?

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