By Matthew Gaude & Shawn McGuire
Benjamin Franklin may have declared that “nothing is certain except death and taxes,” but that doesn’t mean it’s impossible to mitigate the toll taxes take on your wallet. Seen as a necessary evil and a civic duty, taxes can be a burden not only to your current financial situation, but also an obstacle to your long-term goals. But it doesn’t have to be that way. Through intentional planning, you can use these 4 tax-saving strategies to keep more of your money in your own hands.
1. Contribute To A Health Savings Account
As a refresher, health savings accounts (HSAs) offer a triple-tax savings. It may sound too good to be true, but HSAs have no federal income tax, no state or local taxes, and no Federal Insurance Contribution Act (FICA) taxes. If you are eligible for an HSA, your money will be tax-deferred and can be withdrawn tax-free to pay for medical expenses.
Because HSA account balances simply 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. For 2020, HSA owners now have higher contribution limits to help them do just that. If you have individual coverage, you can contribute $3,550, and for family coverage, your limit is $7,100, with an extra catch-up contribution of $1,000 available for those over age 55. 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.
2. 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.
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 out 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. 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 as long as the account is held for more than five years and the account holder is 59½ or older.
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 to do this so you don’t push yourself into a higher tax bracket or be forced to use funds from the account to pay the extra taxes on the distribution.
3. Invest In A College Savings Plan
Now more than ever may be an ideal time to invest in a 529 plan. This type of educational savings plan is a qualified tuition plan created so that families can receive tax benefits for saving toward qualified higher-education expenses. After-tax money is invested in a 529 plan, where it grows tax-free. When the money is later taken out for qualified expenses, there are no federal taxes due. Over 30 states also offer a deduction or tax credit for contributions to a 529 plan. (1)
And to increase the value 529 plans could add to your financial plan, as of January 1, 2018, 529 plans are no longer just for college. Up to $10,000 a year can be used for elementary and high school costs at public or private institutions. This provides a great opportunity for wealthier families who prefer to send their children to private school.
And, as an added bonus, under the newly passed SECURE act, up to $10,000 per year can be withdrawn from a 529 plan to pay any student loans that are still hanging around.
4. 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 will itemize deductions due to the doubling of the standard deduction. In 2018, only 19 million people claimed an itemized deduction, compared to the previous number of 47 million. (2) 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, exceeds $12,000 for an individual filer, and $24,000 for 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.
Getting Ahead With Tax Planning
Tax planning could potentially save you thousands, tens of thousands, and in some cases millions of dollars in taxes paid. Tax planning is incredibly beneficial, but taxes can also be complicated, so don’t go it alone. The IRS tax code is 72,536 pages long and filled with various opportunities and strategies for optimal tax efficiency. The key is understanding how each possible opportunity works and how it fits into your strategy and long-term goals.
With years of experience in financial and tax planning, we know how to determine appropriate tax minimization strategies to help you save more of your hard-earned money. If you have questions about any of these tax strategies and whether they’d be right for you, we encourage you to reach out to us. Call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
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