The right mix of retirement accounts can reduce your future taxes

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Whether you're mid-career or nearing retirement, it's important to know what you're investing in and how those accounts could impact your taxes in the future, experts say.

Many employees take advantage of tax-free savings through a tax-free 401(k) plan or traditional individual retirement accounts. Future withdrawals are subject to federal income tax based on income tax brackets.

However, many advisors recommend using a combination of Roth (pre-tax) accounts, Roth (after-tax) accounts, and taxable investment accounts for greater flexibility during your retirement.

The right mix can “provide many different opportunities to manage your adjusted gross income,” explains certified financial planner Judy Brown of SC&H Group in the Washington, D.C., and Baltimore area.

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Pre-tax distributions may move you into a higher tax bracket or result in higher taxes. Medicare Part B and Part D premiums, explained Brown, who is also an accountant.

The premiums for Medicare Part B and Part D are based on what is called adjusted gross income, which is your adjusted gross income plus tax-free interest, from two years ago.

By comparison, after-tax distributions, such as Roth 401(k) plans or Roth IRAs, are typically not taxed and do not increase your income.

Another bucket is taxable brokerage investments. If you hold these assets for more than a year, you will pay 0%, 15% or 20% on the capital gains, depending on your taxable income.

While higher income earners may face an additional 3.8% levy on broker assets, the combined rate is still significantly lower than the top marginal tax rate of 37% on distributions from pre-tax accounts.

A combination of pre-tax, after-tax and taxable Roth assets can help you adapt to changing tax laws and personal financial circumstances, so you can better manage withdrawals and taxes, says CFP Alyson Basso, managing principal of Hayden Wealth Management in Middleton, Massachusetts.

The benefits of a securities account

Your securities holdings can be especially useful if you have a early retirement before age 59½, says Abrin Berkemeyer, CFP in Houston at Goodman Financial.

Workplace retirement plans and tax-free IRAs typically charge a 10% penalty for withdrawals before age 59½, with some exceptionsHowever, you can use your investment account at any age without penalty.

Berkemeyer says the investment account can also help you achieve other goals before age 59½, such as the down payment on a second home or financing your child's wedding.

According to Tobin Marcus of Wolfe Research, taxes will eventually have to rise to address the deficit

Of course, you'll have to give up certain tax benefits to build your investment account, such as tax-free growth or upfront deductions for deposits, he said.

Ultimately, the right mix of tax-free, Roth, and taxable investments depends on your goals, risk tolerance, and timeline.

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