You can insulate your retirement plan from government policy changes through tax diversification

Estate Planning | Mar 10, 2016 | Hook Law Center

While government policies can adversely affect your retirement, there are steps you can take to minimize the impact that they can have on your life savings. People are usually concerned about tax rates, which can directly affect your strategy for saving, and the amount of funds in your 401(k)s, IRAs and other accounts that are accessible.

One of the ways in which you can protect your retirement is to disperse your retirement savings so that you will have funds in various accounts that are treated differently with respect to taxes. Try not to keep all of your retirement savings in traditional 401(k)s and IRAs, both of which are taxed at ordinary income tax rates upon making withdrawals.

An increase in ordinary income tax rates could cause you to have considerably less cash, after taxes, in retirement. However, because qualified withdrawals from a Roth 401(k) or Roth IRA account are not subject to tax, any savings in those accounts would not be significantly affected by a rise in the ordinary income tax rate.

You can also engage in further diversification by investing in stock index funds and tax-managed funds that yield a great deal of their return in terms of unrealized long-term capital gains. These kinds of gains are beneficial in that they are not subject to tax until you sell, and they are taxed at the same rate at which long-term capital gains are taxed. This rate is usually lower than those at which ordinary income and short-term gains are taxed. And when making withdrawals, you may also fare better by first removing funds from taxable accounts, then tax-deferred 401(k)s and IRAs, and then Roth accounts.

Moreover, be cautious when selecting the types of investments for your retirement plan. If you are worried about a potential future increase in the rate of inflation because of government monetary policy or excessive government spending, you can supplement your investments with natural resources funds, Treasury Inflation Protected Securities (TIPS) or Real Estate Investment Trusts (REITs).

The elder law attorneys at Hook Law Center assist Virginia families with will preparation, trust & estate administration, guardianships and conservatorships, long-term care planning, special needs planning, veterans benefits, and more. To learn more, visit or call 757-399-7506.

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