To be truthful, there are hundreds of things you can do to prepare for retirement, but there is one thing often ignored by most federal employees that can have a huge impact on your retirement.

That one thing is to invest in accounts that are taxed differently, known as asset location.

You mean different TSP funds, Brad?

No, I mean different types of accounts, such as:

• Traditional TSP
• Roth TSP
• Roth IRA
• IRA
• Brokerage account

In a recent conversation with a federal employee approaching retirement, I discovered she has approximately $1.5 million in her TSP. By almost any measure, she has done an excellent job of saving and investing. However, ALL her investing has been in Traditional TSP. Very few people would be disappointed with that balance, but the issue is that every dollar that is withdrawn is taxable income.

Retirement for FERS employees includes the FERS annuity and Social Security, and investment income makes up the rest. When all your investment income is taxable, you don’t have any control over your income.

Here is how each of the different retirement accounts are taxed.

• Traditional TSP and IRAs—All pretax distributions are 100% taxable income.
• Roth TSP and Roth IRAs—All qualified distributions are 100% income tax free.
• Brokerage accounts—These accounts are taxed based on the investment used and how long it is held. If the account is invested efficiently, all gains could be long-term capital gains and taxed at 0% up to the 12% income tax bracket and 15% up to a taxable income of $583,750.

All three accounts are taxed differently; therefore, having funds in all three will give you different distribution options in retirement. The ability to take distributions from different accounts may help you stay in a lower tax bracket and even pay 0% income tax on a brokerage account!

Here is an example of what a distribution plan could look like with different accounts.

Other benefits could come in the form of lower taxes on Social Security (up to 85% of Social Security benefits can be taxed) and avoiding IRMAA surcharges. IRMAA is a surcharge related to Medicare Part B that is based on income. Check out this article for more info on IRMAA and how it may impact you.   

Investing in different types of accounts would benefit nearly everyone preparing in retirement. There is no better way to control your income in retirement than to invest in different types of accounts today—while you are still working. Please reach out to schedule a call if you have questions and would like to discuss working together on your retirement journey.

Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.