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Tax-Free Investing

There is currently a lot of speculation about potential tax law changes. Based on our research, the question does not appear to be “if” the tax law is going to change, but “how” is it going to change? There has been a heightened level of awareness for tax-free investment accounts such as Roth IRAs and Roth 401ks in recent years due to the historically low tax rates. So, the current state of our country leads to the following question — should tax-free investing still be a focus in your plan?

 We will not know for sure until tax changes actually take effect, but if tax rates do jump dramatically, you can make a strong argument for the following strategy:

  • Reduce your investing in Roth accounts, in order to fund accounts that give you an immediate tax deduction
    • This does not mean you eliminate Roth investing, but consider lowering it. If you are in a 30% tax rate and you can put a dollar into a Traditional IRA or 401k and receive an immediate 30% savings, that is worth considering. 
  • If tax rates dip in the future, you can consider converting funds to Roth IRAs at a lower tax rate
  • If the opportunity does not present itself to convert at a lower tax rate during working years, you can wait until you retire to begin withdrawing some of the tax-deferred funds

 At Legacy, our preference is that our clients have tax-deferred, tax-free, and taxable investments. By focusing on all three of the tax buckets, we can strategically withdraw funds during retirement to keep your tax rate as low as possible.


Essentialism: The Disciplined Pursuit of Less

 By: Greg McKeown