As you think about retirement, you may have a vision of what that looks like for you, but how do you pursue that vision? Social Security may not provide enough income for your retirement years, and fewer employers today offer a traditional company pension plan that guarantees you a specific income at retirement. On top of that, people are living longer and must find ways to fund those additional years of retirement. Considering these items in combination means that sound retirement planning is critical, and that often begins with establishing a savings strategy.

Many people think about diversification in terms of asset allocation - the mix of stocks vs. bonds, domestic vs. international positions, or large vs. small cap stocks in your portfolio. It is also important to consider diversification of the investment vehicles you use in saving toward the goals defined by your financial plan because they have very different tax consequences. This may require advance planning, but it can have a big impact in your retirement years.

Traditional IRAs and employer-sponsored plans such as a 401(k)s or 403(b)s are often what come to mind when you think about saving for retirement. These accounts typically involve pre-tax contributions where you get a tax deduction now. Perhaps you also receive employer contributions which are treated like your pre-tax contributions since they aren’t taxable to you at the time the funds are put into your account. While these savings vehicles can be very effective, you may consider other available options since distributions from these types of accounts will be taxable to you – and ultimately to your heirs. Tax rates are likely lower today than what we’ll see in the future. If nothing changes, the Tax Cuts and Jobs Act sunsets after 2025 and rates will automatically revert to prior higher levels. There is a possibility that we will see rate increases sooner than that due to the additional budget deficits created by recent stimulus packages. Finally, the SECURE Act now requires most non-spousal beneficiaries to take distribution of inherited retirement assets within 10 years, meaning that taxable distributions of pre-tax dollars could push them into a higher tax bracket.

Considering the current and anticipated future tax landscape, Roth savings vehicles are often an attractive option. While you don’t get a tax deduction for Roth contributions, when funds are withdrawn the distributions are generally tax-free. There are several different ways to make Roth contributions, starting with a Roth IRA. Contributory Roth IRAs can receive contributions in years when you or your spouse have earned income. If you are over certain income limits, you may consider making a non-deductible contribution to a traditional IRA, then converting that to a Roth IRA. Be careful if you have other pre-tax IRA dollars since the conversion is pro-rata, meaning you can’t convert just your after-tax contribution. Pre-tax dollars in employer plans don’t count for purposes of this conversion ratio. Roth contributions may also be permitted in employer plans like 401(k)s and 403(b)s, and some plans offer what is often referred to as a Mega Roth, where you can make after-tax contributions and then do an in-plan Roth conversion. If you’ve already built up significant pre-tax savings, you may also consider Roth conversions. You don’t necessarily have to convert your entire account and may instead benefit from bracket topping - converting just enough to take you to the top of your current tax bracket. Here’s a recap of the various Roth funding options available to you:

Finally, consider using a Health Savings Account (HSA) if you are covered by a high-deductible health plan (HDHP). HSAs are a fantastic vehicle for funding retirement medical expenses, which can have a big impact on your financial plan. They are a triple threat – you can deduct your contributions, you don’t pay tax on the earnings along the way, and distributions are tax-free if used for medical expenses. If you have pre-tax IRA money saved up and are still covered by an HDHP, you may look into using the one-time IRA-to-HSA rollover provision to shift an amount equal to the current year HSA contributions limits ($3,550 for individual coverage, $7,100 for family coverage, with a $1,000 catch up for people age 55 or older) so that the funds can eventually be withdrawn tax-free. Depending on your HSA balance and time horizon for using the funds, you may have the option to invest the account and experience significant growth to create a resource for funding your future medical costs.

By diversifying not just your asset allocation but the investment vehicles you use, you can set yourself on a path to have the retirement you’ve always dreamed of.