Tax-Wise Distribution Strategy

In the financial planning arena, it’s been said for years that accumulation and distribution are different. But what does that mean? The Tax Wise Distribution Strategy definitively articulates the differences and provides clients the maximum after-tax income in retirement. And advisors using the strategy can clearly share with clients how their advice is easy to understand, solid and advantageous to their financial futures.

The Tax Wise Distribution Strategy identifies the ability to control taxable income as the key difference between the accumulation and distribution phases. During the accumulation phase, income is taxable and clients cannot choose to receive non-taxable income. In contrast, during distribution, clients can prioritize the distributions for each tax brackets. This key difference allows a client to better prioritize how distributions are taken in retirement.

Reducing Clients’ Tax Burden During Retirement

The Tax Wise Distribution Strategy’ takes advantage of the nature of the progressive tax system—the higher the income, the higher the tax rate. Pre-tax income is never distributed at an average tax rate (technically, one might argue it only occurs in the non-taxable portion of the income). Rather, taxable income is subject to a progressive tax table.

Reduce Tax Liability Chart

When a client takes taxable distributions, it occurs within a specific tax bracket. The higher the level of income distributed, the higher the marginal tax bracket. Additionally, in the progressive tax system, distributions in the highest tax bracket represent a greater proportion of taxes relative to income than do distributions in the other tax brackets.

TRAK’s Tax Wise Distribution Strategy provides an efficient distribution strategy that can reduce a client’s tax liability during retirement. It prioritizes pre-tax income for lower tax brackets and uses after-tax incomes (including life insurance or Roth accounts) for higher tax brackets. The strategy creates a significant reduction in a client’s tax burden.

Additionally, the strategy helps younger clients plan how to allocate their savings between pre-tax and after-tax accounts. Clients can easily understand the strategy for saving for retirement and better understand how to allocate savings between pre-tax and after-tax retirement accounts.

This strategy has helped advisors separate themselves from others. And clients appreciate the advanced understanding and care provided by their advisor, and tell others about the advice they have received.

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