If anything is sure in life, it’s that you must pay taxes. But that doesn’t mean taxes have to erode your hard-earned savings. With the right personal tax strategies, you can minimize your tax burden to maximize the money that stays in your pocket.
Tax Planning: What Are the Goals?
For many, taxes are a once-a-year event rather than a lifetime consideration. Here’s why tax planning matters now — and in the future.
Lower Tax Liability
The primary goal of tax planning is to save you money by reducing your tax burden. Whether you’re focused on lowering next year’s tax bill or minimizing future obligations, personalized tax strategies help you take full advantage of the deductions and exemptions authorized by the Internal Revenue Service (IRS).
Retirement PlanningÂ
Regular income streams stop once you retire, so many retirees worry they’ll one day run out of funds. This is where diligent tax planning can help. No matter where you are on your journey to retirement, making tax-smart financial decisions can protect your wealth and boost your post-career income.
Estate PlanningÂ
Tax strategies should be a key consideration in the estate planning process. After all, you don’t want to leave your loved ones with a hefty tax burden. To protect your estate and heirs, you need to keep tax impact top of mind while planning for the transfer of your assets.
Top Tax Strategies to Know
While everyone’s precise tax plan will look different, we’ve compiled some tried and tested strategies that may help you reduce your liability.
Review Your Asset Location
There are three main types of investment accounts, taxable, tax-deferred, and tax-exempt accounts, and each of these can maximize the tax benefits of certain assets. Municipal securities, index funds, and exchange-traded funds (ETFs), for example, are popular for their built-in tax efficiency and, as a result, are often stored in taxable accounts. Conversely, less inherently tax-efficient assets may bring more value in tax-deferred or exempt accounts.
Increase Your Charitable Giving
This is a common tax strategy among philanthropic individuals that want to give back to charity while cutting down their tax obligations. You can deduct cash contributions up to 60% of your adjusted gross income (AGI), and non-cash assets can total up to 30%. Non-cash assets that have appreciated long-term can also help you minimize capital gains taxes — the tax on profits realized from the sale of an appreciated investment.
Convert to a Roth IRA
Unlike traditional IRAs, which are funded with pre-tax money, Roth IRAs require you to pay taxes on the contributions when you make them. Once you retire, you can make qualified withdrawals without paying income tax on the distributions. While it’s difficult to predict your financial future, Roth IRA conversions may be beneficial if you expect to be in a higher tax bracket in retirement, allowing you to pay taxes on your lower contributions and avoid a higher tax bill down the line.
Contribute to a 529 Plan
College tuition is a considerable expense, even for high-income earners. To help balance their spending, many individuals fund a 529 account. Within these tax-advantaged accounts, your contributions grow tax-deferred, and you can make withdrawals tax-free when using funds for eligible expenses. Furthermore, while you won’t be able to deduct contributions on the federal level, you may be able to deduct them on your state tax return.
Open a Health Savings Account
Similarly, you can use a health savings account (HSA) to cover medical costs. Contributions are tax-deductible and withdrawals are also tax-free if used for qualified medical expenses. Employers may offer an HSA, but they’re also available through various financial institutions.
Understand, Manage, and Minimize Your Tax Burden
Looking for more tax tips? At Ironwood Wealth Management, we’re committed to finding you the best personalized tax strategies — because we understand the impact taxes can have on your financial plan. Connect with us today to learn more.
