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That gives you far more flexibility to minimize taxes both before and inretirement.
So why and how should you combine these different account types and assets to maximum effect?
With a taxable account or investment, you pay taxes on the interest or dividends as you earn them.
With tax-deferred assets, you do not pay taxes on your contributions or investment earnings as you earn them.
Instead, you pay income taxes on the withdrawals you take in retirement.
Tax-free accounts and investments are pretty limited.
But Roth accounts offer far more flexibility to withdraw funds early.
you’ve got the option to withdraw contributions at any time, tax- and penalty-free.
Standard taxable investment accounts also let you withdraw money at any age.
However, Roth conversion comes at a cost.
You will pay income taxes in the year of the conversion and once you do a conversion.
Of course, taxes sting more in some years than others.
The tax hit hurts less in these years when you pay taxes at a lower rate.
But without at least one traditional retirement account and one Roth account, you cant make a Roth conversion.
Higher Contribution Limits
Different account typescome with different contribution limits.
While IRAs offer the most flexibility and control over your investments, they come with low annual limits.
Workplace retirement accounts offerfewer investment options, but much higher annual limits.
But they dont require you to drain your Roth IRA.
If you have multiple accounts be sure to patch your beneficiary on each account.
If your net worth is modest this may even help to avoid probate altogether.
Some of the tax benefits can pass along to your heirs as well.
Cagle Fry explained how it works, Roth accounts are great for legacy planning purposes.
Although there are withdrawal requirements formost non-spouse beneficiaries, the withdrawals are typically tax-free.
A Word of Caution
Note that more accounts arent always better.
We tend to advise consolidating like-kind retirement accounts like IRAs, says Jill Fopiano, CEO atOBrien Wealth Partners.
Many clients come to us with multiple IRA or 401(k) accounts from former employers.
But you dont need a dozen retirement accounts.
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