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Here's how to maximize traditional and Roth retirement savings - CNBC

If your retirement money is spread across different types of accounts, you might want to see if your investments are making the most of that.

Because taxation varies among retirement accounts, the investments you hold in each of them should ideally capitalize on those differences, experts say. In other words, you should consider "asset location."

An asset allocation strategy divides your investments among different asset categories, such as stocks, bonds, real estate, cash, and cash alternatives. Asset allocation aims to control risk by diversifying an investment portfolio.

"It matters any time you have more than one account with a different tax attribute," said CPA Jeffrey Levine, CEO of BluePrint Wealth Alliance in Garden City, New York. "That's whether you just started saving or you're near or in retirement."

Jason York | Getty Images

As workers are increasingly charged with saving for their own retirement, they also typically have choices of account type, whether through their employer's 401(k) plan or similar workplace option, or through individual retirement accounts.

In simple terms, the traditional versions of 401(k) accounts and IRAs let you contribute money pre-tax (an immediate tax break) but withdrawals after age 59½ are taxed as ordinary income.

On the other hand, the money you put in the Roth versions of both is after-tax (no immediate tax benefit). However, earnings grow tax-free and withdrawals also are tax-free after age 59½ as long as you've held the account for at least five years. And, you can always withdraw your direct Roth contributions without paying a penalty, which is not the case with traditional 401(k)s and IRAs except in certain situations.

Among companies that offer a 401(k) plan, roughly 65% offer both Roth and traditional accounts, according to the Plan Sponsor Council of America. About 81% of eligible employees contribute to traditional 401(k) plans, 23% to the Roth version, and another 12.6% make after-tax contributions to traditional accounts (this is allowed, within limits, if you hit the pre-tax yearly maximum.)

Here's how thinking about asset location works: Say you're contributing $10,000 to your 401(k), with $5,000 going to the Roth account and $5,000 to the traditional one. Yet at the same time, say your asset allocation — how you broadly divvy up your money — in each account is 80% stocks and 20% bonds.

"You'd probably want that Roth to be 100% in equities and allocate all your bonds to the traditional account," Levine said. "At the end of the day, you go to equities because of their long-term growth potential, and don't you want that growth to be tax-free?"

At the end of the day, you go to equities because of their long-term growth potential, and don't you want that growth to be tax-free?

Jeffrey Levine

CEO of BluePrint Wealth Alliance

In other words, to get the same 80-20 allocation with that $10,000, you'd put $8,000 in the Roth, in stocks, and $2,000 in the traditional account, in bonds.

The idea is that the investments that generate the most growth — and therefore result in the most income down the road — won't be subject to taxes.

The same advice goes for those near or in retirement, whether you contribute directly to both kinds of accounts or are doing a Roth conversion — that is, rolling over money from a traditional account to a Roth.

"In general, the assets you think have the greatest appreciation potential should be in a Roth," said Ed Slott, CPA and founder of Ed Slott and Co. in Rockville Centre, New York.

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While taxes are only one consideration for retirement savers, anything you can do to lower your taxable income in retirement will keep more money in your pocket at a time when you're drawing down your savings instead of adding to your nest egg. And, it also can have a positive ripple effect on other aspects of your financial life, like whether you pay extra for Medicare premiums, your overall tax bracket and rate, and tax deductions you may qualify for.

Of course, determining the best place for your money involves some guesswork and assumptions.

"The idea is to pay the lowest tax rate as you can, and that means doing a best-job estimate of your future tax rate versus your current tax rate, and that's not a precise science," Levine said.

However, with individual tax rates now at reduced levels — they're set to expire after 2025 — many experts expect that there's greater likelihood that taxes will head higher in the future. This means paying current rates on Roth contributions (or conversions) — versus risking paying higher taxes on traditional withdrawals — might make sense for many savers.

Additionally, Roth IRAs, in particular, do not come with required minimum distributions — amounts you must withdraw beginning at age 72 — as traditional IRAs do. Be aware, though, that those RMDs are imposed on both traditional and Roth 401(k)s unless you are still working for the employer that sponsors the plan you're in.

While the type of account you choose to put your money in should be based on an overall plan, there could be good reasons to keep your retirement savings across accounts that are taxed differently. For instance, if you end up having no or little taxable income, you may miss out on certain tax breaks that could allow you to pay an even lower rate.

"It's good to have a few baskets," Slott said. "It's likely taxes will have to go up, but you really never know what your own future tax situation will be."

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Here's how to maximize traditional and Roth retirement savings - CNBC
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