3 Different Types of Retirement Funds & How To Use Them Strategically

(don’t forget to checkout the video of this blog post too)

There are many different ways to save for retirement.

These 3 buckets (that I refer to) all have their own advantages & disadvantages.

These advantages can be from a tax standpoint or a wealth transfer standpoint.

Nonetheless, it’s important to consider your options on the best buckets to allocate your savings to.

Here are the different types of accounts (and their distinct advantages):

✅ Non-qualified Accounts (non-retirement funds)

Non-qualified money has been contributed after-taxes, which means all of those contributions can be accessed tax-free.

Now if you’re using this money to generate interest and/or supplemental income you’ll be subject to taxes on your growth (but not the original contributions).

But, you can utilize insurance vehicles that specifically allow you to shelter this money from an annual tax bill (allowing your money to continue growing tax-deferred with no required minimum distributions).

Or even keep it all invested in stocks that don’t create annual taxation (and can transfer to your loved ones tax-free).

This money is best used for early retirement because there are no penalties for early withdrawals.

This can also be great money to supplement your fully taxable retirement income to help manage your tax brackets in retirement.

✅ Qualified Accounts (classic retirement funds)

This is the best money to spend in retirement because it’s the worst money to leave behind (especially with the elimination of The Stretch IRA).

Now, since this is 100% taxable we want to be strategic about how much we take out of these accounts each year.

We don’t want to take too much money out of this environment every year, which could force us into higher tax brackets in retirement.

But, this is the ideal money to create your income floor in retirement, which is really a baseline level of guaranteed income that you might need to supplement your Social Security Income.

The goal with this money is to spend as much as you possibly can (as early as you can) without creating any inefficiencies from a tax standpoint.

This is why I am often a proponent for using this money in the early years of retirement, taking as much as you can out in the lowest marginal tax brackets.

Then, any money not needed for your own Retirement Income Plan can strategically be repositioned for a tax-free wealth transfer for your loved ones (if that’s something that’s important for you).

✅ Tax-free Accounts

When I talk about tax-free accounts, I’m usually referring to Roth IRA’s.

But, specific types of cash-value life insurance can also be included in this category.

This is a bucket that is 100% tax-free as retirement income…

But it’s also 100% tax-free if you leave any of this money to your loved ones.

That’s why I prefer this type of money invested aggressively to create additional opportunities for tax-free income in your own retirement…

You can supplement your own retirement with this tax-free income knowing that you won’t force yourself into a higher tax bracket.

It can also give you a lot of flexibility if tax rates rise in the future (which most experts believe they will).

So this bucket gives you a lot of flexibility in your own retirement but also gives you a significant opportunity to leave a legacy to your loved ones with a sizeable amount of tax-free wealth.

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