Tax Planning Strategies

Tax evasion is illegal. Tax avoidance is encouraged.

Here is how a financial advisor adds value with tax planning and strategy:

1) 529 College Savings: cash is invested and enjoys tax-free growth and withdrawals, if the money is used for a qualified college expense like tuition, room & board, etc. Unused money can be rolled into a Roth IRA.

2) Roth IRA Conversions: If you are in a low tax year, you may want to convert your Traditional IRA into a Roth IRA. You will pay income tax on it today, but it won’t be taxed again.

3) Roth IRA Contributions: If your income was less than $153k in 2023, you can contribute up to $6,500 into a Roth IRA by tax deadline 4/15/24. Contributions and earnings are then withdrawn after age 59½ tax-free.

4) Health Savings Account (HSA): Triple tax-exempt. Contributions lower taxable income today, invested & grows without tax, and is withdrawn tax-free, as long as it is used to pay for qualified medical expenses.

5) Asset Location: Index funds, ETFs, and tax-exempt muni bonds belong in taxable brokerage accounts. Actively managed mutual funds, taxable bonds, and REITs belong in a tax-deferred account like a 401(k).

6) Reducing Tax Inefficient Investments: Mutual fund portfolio managers try to beat the market by buying and selling quickly. These transactions are taxable events. Rotating out of active mutual funds into passive ETFs can lower your capital gains taxes.

7) Tax-loss Harvesting: Selling single name stocks or old positions that do not align with your investment strategy at a loss to offset capital gains. After you have zeroed out capital gains, you can deduct another $3,000/yr off ordinary income.