Ignore the Hype

Chapter 9How to Avoid the Taxman Without Going to Jail

As you might suspect by now, the solution to your tax problem lies in moving as much money as possible into the tax-free and taxable pools. Doing so has several benefits. First of all, moving money out of your tax-deferred accounts now will minimize your future distributions from those accounts, which will reduce your future taxes. Secondly, distributions from the tax-free and taxable accounts either don't generate taxes or are taxed at much lower rates. So, if in retirement you are primarily living off funds in your tax-free and taxable accounts, you can be living like a king (or at least a prince) while paying taxes like a pauper.

Think about it like this. In retirement you'll wind up pulling cash from all three pools. For example, let's say you want to live off $100,000. You pull funds from your tax- deferred pool up to the top of the 12% tax bracket. You then pull the rest of the money you need from your Roth account at a zero percent tax rate and from your taxable account at a 15% or lower capital gains rate. You're now living at an income level that should put you in the 22% tax bracket. But you're paying taxes at closer to 12%. That means you can:

• Make your money last longer.
• Enjoy a higher standard of living.
• Both of the above!

The key, then, to enhancing your retirement is to create the ability to pull more of your income from the tax-free and taxable pools while minimizing the amount of money you need to pull ...