Tax planning is an essential and yet often overlooked aspect of financial planning. By engaging in tax planning, you can have more control over your financial future. Here’s why.
Tax Planning Matters for Your Income Today
At this level, tax planning involves shielding as much of your income from taxes as reasonably possible while always keeping your overall financial goals in mind. For example, you might contribute money tax free to a flexible spending account that you can use for out-of-packet medical expenses or deduct the expenses you incurred from searching for or moving for a job. Homeowners will make a point to deduct the mortgage interest deduction, while people with high medical expenses can save money by deducting those costs.
Because taxes can be complicated, many people choose to work in partnership with an accountant to make sure that they are taking advantage of all credits, deductions, and other tax minimization strategies.
Tax Planning Matters for Your Long-Term Financial Goals
Being strategic about taxes can also make it easier for you to achieve your long-term financial goals. For example, if you want to set aside money to help your children pay for college, a tax-advantaged 529 account could be a way to do so. The money you put in this type of account grows tax free and can be withdrawn tax free to pay for educational expenses. Cash placed in a health savings account can protect you from the sting of high medical bills in the future.
Consistent tax planning can also free up additional income you can use to reach your long-term financial goals. Money saved on taxes can later be allocated to savings for a down payment on a house, used to pay down student loan debt, save for other major purchases, or fund your retirement.
Tax Planning Matters for Your Retirement
Tax planning and retirement are closely linked. Money contributed to a traditional IRA or 401(k) plan can be deducted from your taxes in the year you make the contribution. But that’s just the tip of the iceberg when it comes to tax planning for retirement. While there are many advantages to avoiding taxes today, you may also want to put some money into a Roth IRA. While you won’t get a current-year tax deduction for money contributed to these accounts, you will get tax-free income in retirement. Many retirees appreciate the option of having both taxable and tax-free income streams in retirement. Some people even set aside some money for retirement in taxable investment accounts, since this income will be taxed at lower capital gains rates.
Tax Planning Matters for Your Heirs
Many people hope to leave some of their wealth to their children, other relative, and favorite charities. If that’s part of your long-term financial plan, you’d be wise to consider taxes as you draw up your plan for your estate. For example, if you want to leave money to your children, you might want to put money in a Roth IRA, since your children will be able to draw tax-free income from the account. Or, you might start transferring some money to your heirs while you are still alive, taking advantage of the annual gift-tax exclusion. Other tax planning strategies you might look into include using life insurance, charitable remainder trusts, charitable lead trusts, or donor-advised funds.
Please call to discuss the pros and cons of these different strategies and whether they make sense for your situation.
Copyright © Integrated Concepts 2015. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.