How Much of Your Assets Should Be Invested In Your Retirement Accounts?

While it’s generally a good idea to defer as much income as possible into your available IRAs, 401(k)s and Roth accounts, as with everything else in life, too much of a good thing can be a problem as well.

When you have the bulk of your financial assets in retirement plans, you might accidentally expose yourself to some risks that you haven’t thought about… since retirement plan assets are much more likely to be impacted by changes to legislation – as we have seen in the past.

In these days when Congress is looking for money just about everywhere, it’s not a stretch to imagine new legislation coming down the pike to tax retirement plan assets (like the 15% “excess” plan accumulations that was enacted in 1986 and later repealed).  Other possibilities include accelerating required minimum distributions to achieve a faster payout taxation of the plan; eliminate the “stretch” provisions; or even nationalization (yikes!) as suggested to Congress by experts as recently as 2008.

Some Food for Thought

Assets held outside of retirement plans enjoy capital gains tax treatment (under current law) that is generally much more favorable than the ordinary income tax rate. Plus, these assets also can receive a step-up in basis when passed to your heirs, removing the capital gains on a lifetime’s appreciation in the account, whereas retirement plan assets do not receive this treatment.

This is not to say that you want to eliminate your retirement plans altogether, but rather to balance your assets by tax treatment.  It makes good sense to diversify by tax treatment, as a hedge against the various things that could occur to the retirement accounts.

There is no perfect formula for determining what is the appropriate amount to maintain in tax-deferred retirement plan accounts versus taxable versus Roth accounts – this is determined by the individual, along with his or her trusted advisors.

Sometimes it makes sense for the individual to have the lion’s share of his or her savings in deferred accounts, such as when we’re very young.  At other stages in life (early retirement before age 70½, for example) it could make a lot of sense to start eliminating the deferred accounts in favor of Roth or taxable accounts.

The idea is to weigh the tax impacts of moving money about against the potentialities that are out there for massive changes to the tax treatment rules on those accounts.

 

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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