By Jonathan Harner, CFP®
Nearly everyone would say they want to increase their wealth and reduce their tax burden. Yet in order to make this real, it’s important to take a proactive approach and develop an ongoing tax strategy. One way to do this is to stay up to date on changes in tax law while taking advantage of deductions and credits available to you in your unique situation.
Establishing a good relationship with a tax professional can help alleviate the burden of doing all the homework yourself. The support of a trusted professional can make planning for retirement easy while providing significant tax savings to your portfolio.
By doing your research, asking for guidance, and understanding the different tax rules, you can reduce your tax bill and keep more of your money. Read on for tips to understand how to utilize the tax rules to your advantage.
Build a Tax-Efficient Retirement Plan
When working with your financial advisor, retirement planning will often be a key point of conversation. By stress-testing your plan, you can quickly see if your current retirement accounts, savings rates, and other assets will be adequate for the retirement lifestyle you desire.
A direct way to reduce your tax bill is to contribute money into tax-deferred savings accounts, such as a 401(k) or IRA. But, in order to maximize your savings, you will need to determine both your current cash flow needs and your ideal retirement income. A proper financial plan will look at both factors and determine the best way to use your tax-deferred savings accounts to save you money both now and in the future.
For example, a $50,000 withdrawal from a Roth IRA could have a wildly different tax impact than that same distribution from a traditional IRA. Creating a tax plan can help you strategically withdraw from your various retirement accounts and reduce your tax liability.
Contribute to Your Health Savings Account
Health Savings Accounts (HSAs) offer triple the tax savings. This may sound too good to be true, but HSAs have no federal income tax, no state or local taxes, if made through payroll
deductions payroll taxes (e.g., Social Security and Medicare taxes). If you are eligible for an HSA, your money will be tax-deferred and can be withdrawn tax-free to pay for qualified medical expenses.
Because HSA account balances roll over from year to year, by contributing to the limit each year, you can build up quite a nest egg to cover either current medical expenses or future medical expenses in retirement. Think of it as a Roth IRA for medical expenses.
As of this year, HSA owners now have higher contribution limits to help them do just that. If you have individual coverage, you can contribute $3,650; for family coverage, the limit is $7,300. There is also an extra catch-up contribution of $1,000 available for those age 55 and older. If you can’t max out the yearly limit, attempt to contribute enough to cover your deductible and take advantage of your employer match, if available.
Use a Roth IRA to Transfer Wealth
Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Although Roth IRAs don’t have RMDs, other accounts like a traditional IRA might. This will force you to increase your income and could bump you up to a higher Medicare range, which can add $100 to $150 each month in premiums.
You probably know the effects taxation can have on your assets and the inheritance you hope to pass on to future generations. For example, if you passed down a traditional IRA, non-spouse beneficiaries used to be able to stretch the distributions from that account over the beneficiary’s life, but now they have to liquidate the account within 10 years of inheriting it (with some exceptions), thanks to the new SECURE Act passed in 2019. This significantly decreases the value of the account due to the amount of taxes paid in a short time. But, if you pass down a Roth IRA instead, there is no income tax due on the distributions (with some qualifications).
If you have traditional IRAs already or earn too much to qualify for a Roth IRA, consider a Roth conversion to remedy the tax loss. The basic process to convert your IRA is to withdraw the amount you’d like to invest in a Roth, pay the tax owed on the distribution, then reinvest it into a Roth account. Be sure to work with a professional to determine the best time, as well as proper amount, so you don’t push yourself into a higher tax bracket or are forced to use funds from the account to pay the extra taxes on the distribution. Also, stay on top of potential tax changes that could limit the availability of this option for you.
Deduct Eligible Charitable Contributions
Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction. Under the Tax Cuts and Jobs Act, fewer taxpayers itemize deductions due to the doubling of the standard deduction. Regardless, charitable giving is still a useful tax-minimization strategy.
In order to benefit from charitable giving, you’ll have to plan ahead. With the new higher standard deduction, you’ll need to make sure your total deductions for the year, giving included, exceed $12,950 for an individual filer and $25,900 for those married filing jointly. If your deductions fall below this amount, consider bunching your giving or doing several years’ worth of giving in one year.
You may also want to look into using a donor-advised fund to combine all charitable contributions in a year and then distribute the funds to various charities over several years. With this strategy, you may be able to itemize deductions in one year and take the standard deduction in the following years so you can achieve a tax benefit that you may not have received otherwise.
Review Your Previous Tax Returns
You can learn a lot from the past. Look at your previous tax returns with a professional to search for deductions or credits you may have missed, opportunities to lower taxable income, and plan for the next tax season. Take these factors into consideration when making a tax plan for the future:
- Review notable tax law changes for 2023 that may affect you
- Review your capital gains and losses
- Review your retirement savings options
- Consider Roth IRA conversions
- Consider additional year-end tax strategies
- Understand potential tax law proposals
Move Forward With a Trusted Professional
Tax planning is an important step to consider when it comes to managing your finances. It can be overwhelming, though, with so many options available. This is why it’s helpful to have a qualified professional guide you through the process, explain the different strategies, and help you determine which one is right for you. you. Our tax planning process includes several steps
throughout the year…
- In the Spring, we send out tax letters to recap what happened the previous year that affects your taxes.
- As we receive client tax returns over the Summer, we review them using a 37-point checklist.
- We run each client’s tax return through our tax analysis tool.
- We send clients a report listing what tax opportunities we recommend and what ones we do NOT recommend.
At Wichita Wealth Management, our team of experienced professionals are here to help. We specialize in understanding the ins and outs of tax planning and can help you make informed decisions about which strategies will be most beneficial for your unique situation and goals.
If you’re interested in exploring how tax planning can help you save more money, please don’t hesitate to reach out. You can contact me at 316-722-1010 or firstname.lastname@example.org to schedule an introductory phone call. We look forward to helping you achieve your financial goals!
Jonathan Harner is a CERTIFIED FINANCIAL PLANNER™ practitioner at Wichita Wealth Management, a fee-only, fiduciary financial advisory firm dedicated to helping their clients thoroughly prepare for retirement. Jonathan’s goal is to simplify the complex so his clients can experience confidence and peace of mind as they work toward and live out their retirement dreams. He specializes in developing and implementing tax strategies that maximize his clients’ money and builds a tax-efficient withdrawal plan for retirement. Jonathan loves finding opportunities for his clients to save money and is dedicated to continual learning and growing in his profession so he can provide solutions for his clients’ financial needs. When he’s not working, you can find Jonathan spending time with his wife, Annie, and their daughter, staying active in his church community, and participating in his two favorite (but vastly different) hobbies: CrossFit and Dungeons & Dragons. To learn more about Jonathan and how he can help you, connect with him on LinkedIn.