Tax Planning

Tax Planning Methods You Could Not Know About

Tax planning is not just a way to reduce your tax burden; it is also an opportunity to build your financial fortune using creative strategies. Smart investment decisions can now reduce your taxable income before and after retirement and set aside funds for future needs.

Whether you focus primarily on your taxes or structure your investment portfolio, with these often overlooked tax planning strategies and thinking outside the box, you can equip yourself and your family for a successful financial future.

The basics of a Roth conversion

Roth conversions allow traditional IRA holders to transfer a portion of their IRA funds to their Roth IRA. A traditional IRA is advantageous as the contributions are tax-free; That is, the contributors don’t have to pay taxes when they make the contribution, and the funds grow tax-free until withdrawn and then taxed like normal income. Roth IRAs, on the other hand, have post-tax contributions, but allow the funds to grow and be withdrawn tax-free.

As a general rule, most financial professionals recommend investing in a traditional IRA if your tax bracket is currently higher than you would expect in retirement, and you should invest in a Roth IRA when your current tax bracket is low so that you can pay taxes on best time.

If you have money in a traditional IRA, the IRS can turn some or all of the money into a Roth. You pay taxes (but no penalties) on the income you “withdraw” and immediately deposit it back into a Roth IRA. This has several advantages, including:

  1. You may now be temporarily in a lower tax bracket than you were when you made the contributions to your traditional IRA. So, this is how you can effectively convert it to a Roth at a discount.
  2. You can move more money to a more versatile account. A Roth IRA conversion allows you to withdraw your principal (but not earnings) at any time after they have vested for five years, with no minimum required dividends required upon retirement.
  3. Otherwise, you may not have access to a Roth IRA. If you earn more than $ 140,000 ($ 208,000 for households), you are not eligible to make Roth IRA contributions. However, a conversion gives you access to this type of account and its benefits.

However, one disadvantage of an IRA conversion is that it can increase your Medicare insurance premiums later. For example, we had a client who could grow their net worth by $ 2 million for life if they converted from a traditional IRA to a Roth, but the move would convert their Medicare premiums for the year around the conversion date Increase $ 4,000. While you should be aware of these drawbacks, it’s important to weigh them against the overall benefits. If you’ve completed your Roth conversion and your income has dropped to a lower amount in the following calendar year, you can file a Form SSA-44 with the IRS and your annual premiums will be lower.

Another way to build your Roth IRA is by overfunding your 401 (k). If you make contributions to your 401 (k) after tax, you can add those funds to a Roth IRA after you retire to access the more versatile account benefits.

Start a 529 plan

A 529 plan is a tax-privileged account used to save for future education expenses. This can be for you, a currently dependent, or any other identified recipient. Contributions to a 529 plan are tax deferred, and residents who live in states with state income tax receive more benefits than those who do not pay state taxes. Different states sponsor different 529 plans, so find the best solution for your needs, even outside of the state you live in. 529 plans are also extremely versatile; they can be used for college expenses (as long as the user enrolls for 12 credits or more) and can increasingly be used for K-12 qualified expenses.

Prioritize your HSA

If you have a high deductible health insurance plan (HDHP), you will have access to an HSA. This account allows you to deposit pre-tax dollars and make tax-free withdrawals for qualified healthcare-related purchases. There are many different benefits to maximizing your HSA (up from $ 3,650 for individual accounts and $ 7,300 for family accounts in 2022):

  • First, these contributions are not taxed.
  • Second, the interest you get on the investment is tax-free.
  • Third, if you withdraw funds for qualifying purchases, that money is also not taxed (regardless of whether you are withdrawing from the principal or the interest).

If you don’t have any chargeable medical expenses, that’s fine – once you reach the distribution age of 65, you can withdraw the funds you deposited for any type of expenses tax-free (you will have to pay tax on your investment income for non-medical expenses output). This can make an HSA more efficient than both a traditional IRA (the pre-tax account) and a Roth IRA (the post-tax account). Maximizing your HSA should definitely be on your tax planning to-do list.

Start planning your tax strategies well in advance of the tax season

The best tax strategies are long term savings plans that can help you minimize this year’s taxable income and create solid investments for the future.

In fact, the private finance community has achieved a general consensus on how to prioritize your investments for minimum taxes and maximum retirement benefits. Follow these steps:

  1. Invest in your 401 (k) to maximize employer contributions.
  2. Maximize your HSA.
  3. Maximize your IRA.
  4. Fill in the rest of your 401 (k) with what is left.

Depending on the benefits available to you, you may also change your “order” to include employee stock purchase plans, open a second source of income to invest in a SEP IRA, or other options.

Allocating your funds to tax-privileged accounts is not a last-minute tactic. Before the current tax year is up, speak to your payroll department – and your financial advisor or accountant – so you can maximize your financial potential.

Securities and investment advisory services provided by Royal Alliance Associates, Inc. (RAA) member FINRA / SIPC. RAA is a separate property and other companies and / or marketing names, products, or services referred to herein are independent from RAA.

This article is written by our contributing advisor and represents the views, not the Kiplinger editors. You can review the advisor’s records with the SEC or FINRA.

CEO and Co-Founder, Mint Wealth Management

Adam Lampe has been helping wealthy individuals, wealthy families, foundations and institutions to achieve their financial goals through holistic financial planning for over 18 years. As CEO and co-founder of Mint Wealth Management, he leads all development efforts within the company. In addition to his extensive customer service, Adam also teaches retirement provision courses at Lone Star College and the Prairie View A&M University satellite campuses near Houston.

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