Creating an Effective Long-Term Tax Plan
Creating an Effective Long-Term Tax Plan
March 1, 2023 | David Lawrence, CFP®, AIF®
My wife and I know many people who have gone on cruises before and loved the experience. As they share the details of their trip, they make all those listening – including us – excited to book a cruise of our own. One reassuring factor for passengers on the cruise is the captains of the ships have years of experience to make the trip safe. As the saying goes, “the captain of a good ship is always looking a mile ahead.” The same can be said for a trusted financial advisor who is “looking a mile ahead” to plan your financial future. This is true for many aspects of financial planning – including taxes.
On our March podcast, Mark and Todd shared that many people look at April 15th as part of tax planning season. However, the 15th is rather the tax filing deadline. Like many cruise ships looking ahead for the best route to take, your long-term tax situation will be better off with proactive planning done by a financial advisor who is not only looking a mile ahead, but rather at the entire trip. While it’s valuable to plan for your tax situation each year, it’s even more important to plan for your entire lifespan. Below are some of the key areas a financial advisor can leverage to create an effective long-term tax plan.
- Roth Conversions – Many people assume their taxes will be lower in retirement, but that’s not always the case. In addition, potential tax-law increases alongside tax-free growth over taxable growth in your retirement accounts make Roth Conversions a very important topic to discuss.
- Roth versus Pre-Tax Contributions – As with Roth Conversions, a review of your current tax situation alongside your future retirement plans is another component to both when, and how much you pay in taxes from your retirement accounts.
- Tax Changes – It’s important to keep a close eye out for changes in an individual’s tax situation that would warrant further review and some additional planning. For example – a pay raise at work, the birth of a child, tax law changes by Congress, and withdrawals from investment accounts, just to name a few.
- Tax-Efficient Investing for Non-Retirement Accounts – As shared in this month’s video series, Todd shared the analogy that investing in accounts outside of your IRA or 401(k) (i.e. non-retirement accounts – many times this can be Mutual Funds, for example) can feel like buying a bag of chips and when you open the bag, you’re a little disappointed to see the bag only half full – the rest was air. In your non-retirement accounts the amount of growth you get to keep after taxes (the chips) is many times less than what you expect. Tax-Efficient Investing aims to reduce the taxes (the air) and leave you with more potential growth.
- Tax-Efficient Withdrawal Strategies – It can feel quite daunting when faced with the decision of which account – Roth IRA, Traditional (“regular”) IRA, non-retirement investment account, savings account – to use when making a big withdrawal for home renovations, car purchase, debt payoff, or monthly income in retirement. These decisions require looking at the “entire trip,” not just the “next mile” to evaluate the most effective way to handle the taxes you will have to pay over your lifetime.
- Estate and Gift Taxes – It’s important for everyone to realize that you can maintain some control over your money – even after you have passed away. The accounts you choose to leave to a loved one each have “baked-in” rules, requirements, and different tax-implications.
Contact us to learn more about how Kemp Harvest Financial Group can support your financial life.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.