Building flexibility, and a legacy, for the future
When most people hear the word diversification, they think about investments, spreading money across stocks, bonds, and other assets to manage risk.
But there’s another form of diversification that can be just as impactful over time: tax diversification.
At its core, tax diversification means spreading your savings across accounts that are taxed differently. Done well, it creates flexibility, not just for your retirement, but also for the legacy you leave behind.
Flexibility, especially later in life, is one of the most valuable assets you can have.
Three Bucket Approach
Most retirement savings fall into three categories. Understanding how each works is the foundation for everything else.
Bucket 1: Tax-Deferred Accounts
Traditional IRAs and 401(k)s are the most common starting point.
- Contributions are made pre-tax, reducing income today
- Withdrawals are fully taxable in retirement
- Growth compounds tax-deferred
This works well if you expect to be in a lower tax bracket in the future — but it creates future tax exposure and required withdrawals that may work counter to that.
Bucket 2: Tax-Free Accounts
Roth IRAs and Roth 401(k)s:
- Contributions are made after-tax; meaning your income is not reduced today
- Qualified withdrawals are completely tax-free1
- No required minimum distributions (for Roth IRAs)
For many investors, this is a powerful way to lock in today’s tax rates and eliminate future uncertainty.
Bucket 3: Taxable Brokerage Accounts
Often overlooked, but incredibly valuable:
- No contribution limits
- No withdrawal restrictions
- Potentially favorable capital gains tax treatment
- Eligible for step-up in cost basis at death
These accounts provide flexibility both before retirement and as part of a legacy strategy.
Why This Matters More Than Ever
The future is uncertain:
- Tax rates may rise
- Income needs may change
- Laws and regulations will evolve
If all your assets sit in one bucket, you’re effectively making a long-term bet on future tax policy.
Tax diversification gives you the control to:
- Manage your tax bracket year-to-year
- Reduce taxes on Social Security
- Avoid Medicare premium surcharges (IRMAA)
- Optimize withdrawal sequencing
Instead of reacting to taxes, you should be actively planning around them.
Required Minimum Distributions (RMDs): Updated Rules
One of the biggest drivers of tax inefficiency in retirement is Required Minimum Distributions (RMDs) from tax-deferred accounts.
Under current law (SECURE 2.0), RMD ages depend on your year of birth:
- Born 1950 or earlier → RMDs began at age 72
- Born 1951–1959 → RMDs begin at age 73
- Born 1960 or later → RMDs begin at age 75
Key implications:
- RMDs are mandatory and taxable
- They can push you into higher tax brackets
- They may increase taxation of Social Security
- They can trigger higher Medicare premiums
This is where tax diversification becomes critical — having assets in Roth and/or taxable accounts allows you to offset or manage the impact of RMDs.
Legacy Planning: Where Tax Diversification Really Shines
Tax diversification isn’t just about your lifetime — it’s also about what happens after you’re gone.
Different account types pass to heirs very differently:
Tax-Deferred Accounts (Traditional IRA/401k)
- Heirs must typically withdraw funds within 10 years (non-spouse beneficiaries)
- Withdrawals are fully taxable as ordinary income which can create a significant tax burden for beneficiaries in peak earning years
Roth Accounts
- Still subject to the 10-year rule, but:
- Withdrawals are tax-free
- Allows heirs to let assets grow longer without tax impact
This makes Roth assets one of the most efficient wealth transfer tools available.
Taxable Brokerage Accounts
- Investments receive a step-up in cost basis at death
- Unrealized gains are often completely wiped out
- Heirs can sell with potentially little to no tax consequence
Strategic Legacy Insight
A well-diversified tax strategy can allow you to:
- Create a more tax-efficient withdrawal strategy in retirement
- Preserve Roth and taxable assets for heirs
- Potentially execute Roth conversions during your lifetime to shift tax burden to lower-rate years
In other words, you’re not just planning for your retirement — you’re designing how wealth flows across generations.
Practical Ways to Build Tax Diversification
There’s no one-size-fits-all approach, but common strategies include:
- Contributing to Roth accounts (especially in lower-income years)
- Roth conversions during market downturns or income gaps
- Maintaining a taxable investment account for flexibility
- Strategically planning withdrawals across buckets in retirement
- Coordinating with a financial advisor and tax professional annually
Each move may feel small on its own — but together, they create a highly flexible and efficient system.
The Bottom Line
Tax diversification isn’t about predicting the future — it’s about preparing for multiple outcomes.
It gives you:
- Control over your income
- Flexibility in changing environments
- Efficiency in retirement spending
- And intentionality in legacy planning
When your assets are spread across different tax treatments, you’re no longer locked into one path.
You have options.
And in both retirement and legacy planning, options are everything.
Small, consistent decisions made today can have an outsized impact decades from now.
The best time to start building flexibility — for yourself and for the next generation — is now.
1 https://www.schwab.com/ira/roth-ira/withdrawal-rules
Connecticut Capital Management Group, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
