Enhancing Tax Efficiency: A Proactive Approach to Financial Planning
As the tax deadline comes and goes, many individuals find themselves facing hefty bills and, in some cases, pointing fingers at their CPAs. However, we find it’s typically not the accountant’s fault. A CPA's role is to accurately file what has already been done not plan ahead. Let’s now shift our focus towards what can be improved for your future taxes.
Let's look at some commonly overlooked areas from the previous year our team saw and how proactive planning can make a significant difference in your financial plan.
Not planning the combination of accounts for retirement withdrawals:
One common oversight is failing to strategize the combination of accounts from which to withdraw funds during retirement. Different types of accounts are taxed differently, and optimizing withdrawals can help manage tax brackets effectively.
Consider running tax projections to develop a withdrawal strategy that helps minimize tax bills while not lowering how much you live off.
Excess cash with no tax or spending plan.
Many individuals find themselves with cash assets (Savings, CD’s, Money Markets, High Yield Savings), which might seem safe but can be painful from a tax perspective. Cash holdings generate ordinary income.
Instead of letting cash accumulate, consider deploying some of these funds into tax-advantaged accounts like IRAs, Roth IRAs, or Health Savings Accounts (HSAs) to help reduce taxable income and potentially lower tax brackets.
Retiring before 59 1/2 without leaving money in a 401(k):
Retiring before the age of 59 1/2 can create a unique challenge if not planned years in advance, however, there is a unique provision with 401(k)s about accessing retirement funds without the big 10% penalty. If you stopped working there’s a good chance you could access funds from a 401(k) starting at age 55 if you leave your job.
By strategically leaving a portion of your retirement savings in a 401(k), you can access these funds without penalties while still benefiting from tax-deferred growth.
Maximize tax-advantaged accounts:
Reevaluate if you're making full use of available tax-advantaged accounts for your goals. Accounts like IRAs, Roth IRAs, HSAs, and 401(k)s. These accounts offer valuable tax benefits, including tax-deferred growth or tax-free withdrawals, depending on the account type.
Gifting from your IRA after 70 1/2:
Individuals aged 70 1/2 and older are allowed to gift to charities without first claiming the income! Making qualified charitable distributions (QCDs) directly from your IRA to eligible charities can be large tax savings we see missed often.
Consider gifting strategies:
Gifting can be a powerful tool for reducing taxes and transferring wealth efficiently. However, it requires careful planning to maximize its benefits.
Explore options such as "bunching" charitable contributions to exceed the standard deduction threshold, allowing you to itemize deductions and potentially reduce taxable income.
You need to itemize your taxes to get a tax deduction for giving.
Consider gifting appreciated stock instead of cash
Taking a proactive approach to tax planning can yield substantial savings in your financial situation. By planning ahead many see savings they were unaware of. Tax planning doesn’t have to be just for the wealthy!
Disclosures:
This is for educational purposes and not specific tax advice.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. AI (artificial Intelligence) sourced articles may be prone to error, due to the vast information they assemble from the internet. Always confirm any questions or concerns you may have with an experienced professional. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual