Comments on: Tax Diversification — Why It Pays To Tax Diversify

By: Sunday Link Rodeo #1 « Evolution of Wealth

Sunday Link Rodeo #1 « Evolution of Wealth — Sun, 27 Sep 2009 23:52:44 +0000

[...] Tax Diversification — Why It Pays To Tax Diversify from @Moolanomy I think that tax diversification is a key in planning in this current economic environment. I’m all about people having options and flexibility with their money and this definitely gives them that. I think it’s a great article to get you thinking about something that most financial planners never even mention. [...]

By: Student Loans By the Numbers

Student Loans By the Numbers — Sun, 27 Sep 2009 22:45:54 +0000

[...] Tax Diversification (my guest post from earlier this week at Moolanomy) [...]

By: Mike Piper

Mike Piper — Thu, 24 Sep 2009 00:57:30 +0000

Excellent. Thank you for the suggestions.

By: Michael Harr

Michael Harr — Thu, 24 Sep 2009 00:10:53 +0000

I would start with ‘Your Complete Retirement Planning Roadmap’ or ‘Stay Rich for Life’ depending on how much depth you’re looking for. He’s hard to watch on the tele, but there can be no doubt that he knows his stuff inside and out. Either of these books are great reads for anyone who is getting serious about retirement planning. If you like the dirty details, go with the former, if you like a little more spin, go with the latter.

By: Mike Piper

Mike Piper — Wed, 23 Sep 2009 23:39:49 +0000

Hi Michael.

Thanks for the link re: historical top marginal tax brackets, that’s some pretty interesting information.

As to Ed Slott, I’ve been meaning to pick up a book by him. Any suggestions as to a particularly good one? Or should I probably just go with the most recent?

By: Michael Harr

Michael Harr — Wed, 23 Sep 2009 15:40:56 +0000

To add a little teeth to this argument, take a quick look at historical top marginal tax rates at http://www.truthandpolitics.org/top-rates.php. Ed Slott has made a fortune out of tax diversification (he’s a bit on the extreme side of things), but this post is very solid in the advice of ordering retirement contributions by tax buckets.

By: Mike Piper

Mike Piper — Wed, 23 Sep 2009 12:19:53 +0000

Hi EoW: As to your second question, my experience is that most investors still don’t have a Roth option in their 401k. If they do, then what I’d suggest depends upon their income level (and whether they’re eligible for deductible traditional IRA contributions, Roth contributions, or neither).

Though I suppose in most cases my answer could be summed up as “do some of each.” Brilliantly sophisticated, isn’t it?

As to the question of people who don’t qualify for a Roth, my suggestions at that point would depend in large part upon their goals. (For example, a low-cost variable annuity can provide for a decent method of tax-deferred growth. But to the extent that leaving money to heirs is a priority for the investor, annuities begin to make less sense.)

Or, depending upon circumstances, the “backdoor” method into a Roth (via contributing to a nondeductible IRA, then converting it in 2010 into a Roth) can potentially make sense. But, as far as I can tell, the desirability of that strategy depends upon the investor’s current income level, projected retirement income level, and existing value of investments in tax-deferred accounts.

In short, my answers are:
1) It depends, and
2) This is a circumstance in which a well-informed accountant/financial planner can provide a lot of value.

By: Evolution Of Wealth

Evolution Of Wealth — Wed, 23 Sep 2009 11:55:37 +0000

What is your advice for those that don’t qualify for a Roth? This means they are in a high tax bracket so do you skip that step and go right to taxable investments?
Also, when you mention maxing out a 401k should that be the traditional portion or the Roth portion?