AndreaCoombes

Saving money for retirement is difficult enough. Don’t undermine your hard work by paying a steeper-than-necessary tax bill.

Planning for taxes is complicated, of course, and will vary depending on your situation. Consulting an expert makes sense, and now that the annual April 15 filing deadline is almost past, some tax pros may have more time to chat about a long-term strategy.

And don’t forget you’re at the whim of Congress, which can mean smaller changes are better than drastic ones.

“You don’t want to make a huge decision today that you think is going to be this great tax move and have the tax law change in 10 years,” Scott Halliwell, a certified financial planner with USAA, a financial-services firm for military personnel, in San Antonio. “With taxes, everything in moderation is better than all or none,” he said.

Here are eight strategies to consider.

1. Give yourself options

People often argue over whether a traditional 401(k) or IRA, on one hand, or a Roth IRA on the other is best for retirement savings. But many financial planners say it’s smart to go with each kind of account, and possibly a taxable account, too.

TAXES

Big tax bills can devastate your retirement savings. MarketWatch’s Robert Powell and Andrea Coombes talk about strategies to employ before and during retirement to lower your taxes.

RetireMentors: In-the-trenches advice

Ways to boost Social Security payout

Retire here, not there: California

10 things your 401(k) plan wont tell you

“The people that have all three of these buckets give us the most flexibility to manage their taxes later in life,” said Scott Cramer, president of Cramer & Rauchegger, a financial planning firm in Maitland, Fla.

For example, each year retirees could pull just enough taxable income from their IRA to avoid bumping into a higher tax bracket, and use after-tax income from the Roth for the rest of their needs.

In addition to gaining flexibility, you mitigate against tax uncertainty. Savers are often told the best vehicle for them depends on their retirement tax bracket. But given tax-law uncertainty, “It’s almost an absurd thing to try to figure out,” Halliwell said. “If you went all in in the pretax [traditional IRA] and it turned out your tax bracket in retirement was higher, that’s not going to do you any good.”

2. Consider asset location

You’ve come up with your asset allocation —but now how do you divvy up your chosen mix of stock, bond and alternative holdings into various investment locations. depending on tax status?

Even the professionals disagree on what’s best. And what’s best for you will depend on your tax bracket, how long you’ve owned the asset before you sell, and other factors.

Mitchell Freedman, CPA/PFS, of MFAC Financial Advisors Inc. in Westlake Village, Calif. said he often puts the majority of his clients’ bond holdings in tax-deferred accounts such as 401(k)s and IRAs, to delay the income-tax hit on the interest.

He said he often puts stocks into taxable accounts, where many investors enjoy a 15% long-term capital gains tax rate. (Investors in the bottom two tax brackets generally pay zero on those gains currently.)

For his part, Brett Horowitz, a certified financial planner and principal at Evensky & Katz LLC in Coral Gables, Fla. said: “Any kind of high-yielding bonds or income-yielding stocks—all those investments that would cause taxes to be high—those go to the top of the list in terms of assets that should be sheltered or put in an IRA.”

Tax-exempt municipal bonds, stock index funds that don’t pay out large annual capital gains and similar tax-efficient investments “would go in taxable accounts,” Horowitz said.

3. Rebalance your way to tax efficiency

Organizing your money for maximum tax efficiency is easier if you’re sitting on cash and can divvy up your money into different accounts. It’s harder if your money is already invested. You run the risk of owing a big tax bill as you sell and reinvest your money on the path to tax efficiency.

“It can be done, but it’s got to be done carefully, sometimes over the course of years,” Halliwell said.