When we hear the word “diversification”, we typically think of investments, and the importance of not “putting all of your eggs in one basket.” What doesn’t immediately come to mind is diversifying the assets themselves. Taxation can have a large impact on our assets.
Diversify to Reduce Taxes and Increase Income
Tax Diversification – Tax diversification can help you reduce taxes and increase your total spendable income. Assets can be grouped into three categories depending on how those assets are affected by taxes.
- “Taxed Today” – assets are liquid and are best positioned for short-term needs
- “Taxed Tomorrow” – assets are generally earmarked for longer-term needs, such as education and retirement.
- “Tax Advantaged” – assets not only accumulate tax-free, but their proceeds can often be distributed tax-free. You must work with a competent advisor when selecting the appropriate tax advantaged assets for your situation as many of them have limitations and restrictions. For instance:
- Roth IRA contribution limits are tied to your income, and Roth IRAs have restrictions that could penalize your withdrawals.
- Municipal bonds tend to have lower yields than taxable bonds.
- Life insurance has mortality charges and is underwritten according to your individual health situation, which might preclude people of poor health.
A Balanced Approach – At Brooks Capital Strategies, we use a comprehensive approach that will consider all three asset categories and identify how you can best meet your goals. Income tax diversification may provide additional control and more flexibility for your future. Feel free to contact us to look at your specific situation. We are here to help.
