What's the IRA Mistake Almost All Retirees Make?
Picking funds and diversifying your portfolio isn't enough. You have to have a plan on dealing with taxes, too. You need to diversify your investments based on their different tax treatments.
Good financial advisers and smart investing DIYers have something in common when it comes to building a portfolio.
They both put a high priority on risk tolerance and how it applies to asset allocation.
After all, a diversified blend of stocks, bonds and cash is the well-established path to reaching your retirement goals. It helps you grow and protect your nest egg and retire with the money you need … right?
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Well, yes. But if that’s your only focus, you’re likely neglecting another crucial piece of long-term portfolio planning: tax efficiency.
I see people, even some financial professionals, make this mistake all the time. They determine risk tolerance — often with an in-depth risk assessment tool — then go for a stock-bond mix based on the suggested asset allocation.
And that’s it. They’re investing and growing their money as comfortably, and safely, as possible. Or so they think.
Unfortunately, they haven’t put much thought into how those investments will be taxed when they retire and start drawing income from their savings. All too often they’ve created a tax trap inside their tax-deferred IRA.
That’s bad enough, but when I see an investor whose portfolio includes taxable and tax-deferred accounts that mirror each other exactly, it really makes me scratch my head. When it’s a retiree with a large nest egg or a high income-tax rate, I just want to jump in and fix it.
The problem? That investor is growing her IRA and, therefore, her required minimum distributions (RMDs). Those mandatory withdrawals, which begin at age 70½ whether you want them or not, will be taxed as ordinary income — the highest tax rate.
But she doesn’t have to do it that way if she also has a taxable account, which doesn’t have RMDs and offers other advantages for handling the growth in her portfolio, including tax harvesting possibilities and profits that are taxed at the lower capital gains rates, instead of as ordinary income.
Here’s a hypothetical: Let’s say our investor, Sandy, is 70½ years old and has $500,000 in her IRA and $500,000 in a taxable brokerage account. For the next 20 years, she plans to take only her RMDs and let the rest of her investment savings compound. She wants her money to grow, but not by putting it at too much risk, so she fills out a risk assessment questionnaire that tells her to use a 50%-50% blend of stocks and bonds.
Sounds pretty simple. Except that Sandy puts the exact same blend of investments in both her IRA and brokerage accounts. That could cost her thousands of dollars, thanks to the effect taxes will have on her returns (not to mention the likelihood of duplicate management fees).
Sandy was off to the right start worrying about risk and determining which specific stocks, bonds and other investments best met her portfolio needs. But she (or her adviser) should have taken it a step further by looking at those investments and assigning them to either her IRA or brokerage account based on how they’re taxed.
Her strategy could have been to place her more conservative investments (those with lower expected returns) in her tax-deferred IRA and her more aggressive (higher-earning) assets in her taxable brokerage account or a Roth IRA. Each account still would have been working hard for her but in very different ways. The conservative funds in her IRA would fill her need for safety, and as they grow more slowly, the higher tax rate wouldn’t take as big of a bite. Meanwhile, the more aggressive funds in her taxable brokerage account would grow more quickly, but be taxed at a lower rate.
If, like Sandy, you have the same or a similar blend of investments in your accounts, it’s probably going to cost you. But if you coordinate your accounts instead, you can cut your tax liability considerably.
I believe managing taxes in retirement (and pre-retirement) is just as important to financial success as choosing the right investments. If you don’t have the time or inclination to research the tax consequences of your investments yourself, find a trustworthy CPA or financial adviser to help you out.
You’ve worked hard to build your nest egg. Don’t lose that money to a mistake.
Kim Franke-Folstad contributed to this article.
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and RightBridge Financial Group are not affiliated companies. Investing involves risk including the potential loss of principal. Any references to protection benefits or lifetime income, etc. generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. AW06172999
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Keith Gebert, a Chartered Retirement Planning Counselor, is the founder and CEO of RightBridge Financial Group. He has passed the Series 65 Securities exam and holds life, health and annuity insurance licenses.
-
Is Mint Mobile's Home Internet a Game-Changer or Just Another Option?Mint Mobile recently unveiled its new home internet service. We break down how it works so you can determine if it's a great value for your needs.
-
How to Add Your Driver’s License or State ID to Google WalletStore and use your digital ID securely on your Android device for TSA, age verification and more.
-
Five Downsides of Dividend Investing for Retirees, From a Financial PlannerCan you rely on dividend-paying stocks for retirement income? You'd have to be extremely wealthy — and even then, the downsides could be considerable.
-
I'm a CPA: Control These Three Levers to Keep Your Retirement on TrackThink of investing in terms of time, savings and risk. By carefully monitoring all three, you'll keep your retirement plans heading in the right direction.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.