For advisors seeking to add value for clients who are entering or who are already in retirement, implementing tax efficient investment strategies can help minimize taxes, leaving more assets available for lifestyle enhancements or legacy planning.

There are three important issues for advisors regarding the impact of taxes on retirement:

Choosing which accounts to place certain assets in can have a meaningful impact on the overall tax liability generated by a client’s portfolio.  Generally, it is advantageous to put more tax-efficient assets (e.g. index funds, tax managed strategies and municipal bonds) in taxable accounts and less tax-efficient assets (e.g. higher turnover active managers, taxable bonds) in tax-exempt and tax-deferred accounts.

One way to improve tax efficiency in a retirement portfolio is to be thoughtful about where cash is sourced from to support spending needs by spending from specific accounts in a specific order:
  1. Take any required minimum distributions from tax deferred accounts such as IRAs and 401(k)s. Those are required once you turn 70 1/2.
  2. If funds are still needed, taxable accounts are next on the list.
  3. Finally, to permit the longest possible tax-exempt or tax-deferred asset appreciation, take any additional assets required out of Roth and traditional IRAs last.
Investment Considerations
Of course, individual circumstances can dictate a change in this rule of thumb– investors and their advisors should consult with a tax professional with case-specific questions. For example, if there is a large capital gain that would be triggered by spending out of a taxable account, it might make sense to take more money out of a Traditional IRA or go directly to the Roth.

Tax issues can vary on a year-to-year basis as well. If you have a large medical expense one year, that could drop you down to a lower tax bracket, meaning that it could be more advantageous to take more assets out of a traditional IRA while in that lower tax bracket. Those assets are taxed at ordinary income rates and a reduction in tax on traditional IRA withdrawals can provide significant tax relief.

A final word
Tax considerations may well be more important to investors in retirement than they were in the accumulation phase. The complexity of working through these issues can be challenging, but offers an opportunity for financial advisors – perhaps in collaboration with tax professionals – to make a more meaningful contribution to their clients’ financial well-being. More information on taxes and tax management is available here.

Traditional IRA - An IRA or Individual Retirement Account allows individual to direct pretax income, up to specific annual limits, toward investments that can grow tax-deferred (no capital gains or dividend income is taxed).

Roth IRA - A Roth Individual Retirement Account is a retirement plan in which contributions are not tax deductible and qualified distributions are tax-free, provided the account has been open a minimum of five years.

401K Plan is a type of qualified retirement plan in which employees make salary reduced, pre-tax contributions.

Natixis Global Asset Management does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.


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