You've diversified your portfolio by putting money into a variety of investments. But, have you diversified your tax burden?

You may think your retirement stash is thoroughly diversified because it's spread across large and small stocks, growth and value funds, government and corporate bonds, US and foreign investments. Have you considered whether you are tax diversified?

Failure to diversify you tax exposure before your retire could reduce what you have to live on later. Let's talk about how you can gain more control over your tax bill in the future.

The beauty of 401K (or any such retirement plan) is that contributions are excluded from taxable income, giving you an immediate break, plus your gains compound without the drag of taxes. But, you're not escaping taxes, just postponing them until you withdraw the money - at which point you assume you'll be in a lower tax bracket.

What if you're not? What if you find yourself facing a higher tax rate in retirement? Think about this: You've been working hard your whole life to plan for a comfortable retirement. You've scrimped and saved large amounts in your retirement plan. Your home mortgage deduction could shrink or disappear by the time you retire. PLUS, you won't have retirement plan contributions pushing down your taxable income. Is it possible that the Government could hike tax rates in the future?

This brings us to the downside of having retirement assets heavily concentrated in retirement plans like 401K and SEP. Instead of working the tax system to your advantage by deferring taxes at a high rate and paying them out in a lower one, you could end up doing just the opposite.

Think tax diversification. Fund accounts that generate both tax deferred, tax favored and tax free income.

ROTH IRA (S7): pay tax on your contribution today for the promise of of tax-free withdrawals in retirement
CAPITAL GAINS (G4, 5 & 6): have some assets in your taxable accounts the create most of their return through unrealized capital gains (or rising share price). These gains are taxed at a maximum of 15% (vs. 35% for ordinary income.
MUNICIPAL BONDS (G2): income from municipal bonds is tax-free (some are exempt from state and federal tax).
CASH VALUE LIFE INSURANCE (S7): provide death benefit protecting your family from your premature death and build tax deferred value. If done 'correctly', you can avoid taxation on withdrawals from the cash value.

Keeping money diversified from a tax perspective will give you more maneuvering room when it comes to retirement. Keeping your options open will give you peace of mind because all your account balances represent spendable cash, not theoretical figures on paper which can't be spent.

There's no guarantee that this strategy will give you the biggest retirement payout. However, diversifying your tax burden along these lines should give you more leeway to minimize the government's share of your nest egg. I'd say that's money and time well spent.