Most people think it’s smart to divert income regularly to an employer sponsored retirement account or an individual IRA. Of course, those folks are miles ahead of the majority of Americans in setting money aside at all, but how you do it can make a big difference come retirement time.

I see people losing thousands of dollars every year when they don’t look at tax consequences, especially possible savings, as they make decisions about funding retirement. 

Diversifying gives you more control with tax liabilities

IRAs and 401(k)s are great investment vehicles if they fit your individual situation. Sometimes it makes more sense to maximize your benefit in a brokerage account. This can help reduce your taxes when you have other financial matters to consider with your household.

For example, perhaps you had an unusually low-income year. It’s common for small business owners to experience profit ebbs and flows. It might make more sense to realize some capital gains to reset your cost basis and pay off some bills than to max out your IRA contribution.

Alternatively, you could be looking at a big capital gains debt from a real estate sale. If you have stocks and bonds, you can take some losses to offset that tax hit.   

There are a lot of reasons you might want to reduce or add income to your tax return. You can’t do this effectively if you’re not paying attention to all your income streams and expenses each year. In most cases, once a new year hits, you’re stuck with the decision you made – or didn’t make – the year before. 

Management fees add up

Another thing to consider with 401(k)s and IRAs are the fees. According to the Center for American Progress, the average American pays out 1% in fees, or $138,000 in lifetime retirement account management fees. If you’re paying 1.5% or even 2%, which isn’t uncommon, those numbers get a lot bigger. Fees under 1% can save you tens of thousands of dollars.

Know your numbers

So often, people think they’re doing the right thing by adopting a set it and forget it practice. If you’re dealing with company matches to a retirement fund or don’t have varying financial issues facing your household, that makes sense. Most of us, though, face income and expense surprises. Tax costs for these changes can be considerable. With the many recent changes to federal tax law, it makes sense to talk to someone who understands how retirement funding decisions affect your taxes this year, and for decades to come.