3 Pots of Money

It will be necessary to have several pots of money for your retirement savings. This strategy will essentially allow you to be able to control your own tax bracket as you draw money for your needs in retirement.  These pots of money would include the following:

Tax Deferred Pot:

These are accounts that reduce your current tax liability by either reducing your current taxable income and/or defer the tax owed on interest or growth until assets are withdrawn in the future.  Examples of these types of assets are:

O 401(k)

O Pension Benefits

O Traditional IRA’s

O 403(b)

Tax-Free Pot:

These are accounts that you would invest after-tax monies in an account and when the principal and earnings are withdrawn would be totally federally and/or state tax -free.  Examples of these types of assets are:

O Roth IRA

O Cash Value Life Insurance

O Municipal bonds

After-tax Pot:

This type of account, you would establish with monies you receive after-taxes are paid, such as your discretionary income.  With this type of account, you would invest after-tax dollars and as the investment(s) grow overtime you would pay tax on capital gains that are realized and/or any interest earned over the course of a tax year.  Thereby paying tax as you go, potentially limiting the amount of overall taxes paid when an investment is sold.  Examples of these types of assets are:

O Mutual Funds

O CD’s

O Stocks

O Bonds

At retirement it is important to have three pots of money in order to control the amount of taxes on your retirement income. A tax-free pot, such as, a Roth IRA or municipal bonds, an after-tax pot, such as, non-qualified accounts (mutual funds, stocks, CD’s, etc.) and a tax-deferred pot, such as, a 401(k), IRA, 403(b) and pensions.  Your current situation is as follows:

• Your tax-deferred pot

• Your tax-free pot

• Your after-tax pot