Why Tax and Investment Planning Isn't Just for the Self-Employed
Pop quiz: Are you a W-2 worker who thinks financial planning is for self-employed gurus and Wall Street sharks? If so, raise your hand (and prepare to lower it in a moment!). The myth that financial planning is only for the "extraordinarily entrepreneurial" needs busting, like yesterday. Because here's the truth: taking control of your finances, whether you work as an employee of self-employed, is the important.
Think of your W-2 like a steady stream of income – a valuable foundation, but not the entire building. To truly secure your financial future, you need to think beyond that paycheck and embrace some proactive planning. Enter the world of tax and investment strategies, where even small tweaks can yield big rewards.
But where to begin? Worry not. We've crafted a tax and investment planning checklist specifically for you, packed with powerful strategies to kickstart your financial journey this year.
The Tax-Savvy Checklist:
1. HSA Contributions: These golden eggs let you set away pre-tax dollars for healthcare expenses, lowering your taxable income and growing tax-free to use for medical expenses over your lifetime. Maxing an HSA out is a huge tax savings every year!
2. Tax Loss/Gain Harvesting: Feeling the market blues? Don't fret! Strategically selling investments at a loss to offset gains can lower your tax bill. This gets complex. You should consult a financial advisor for guidance on this.
3. IRA or Roth IRA Contributions: Invest in your future with these individual retirement accounts. Traditional IRAs offer tax-deductible contributions in the year they are made and Roth IRAs let your investments grow tax-free! – choose wisely! Look at what tax bracket you are in now, how many years you have until you’ll use the money and your expected tax bracket in retirement.
4. 401(k)/403(b) Contributions: Take advantage of employer matching to supercharge your retirement savings. Many employers will add money to your retirement account as an added benefit of working for them! Don’t give up that free money.
5. Backdoor Roth IRAs: If you can't directly contribute to a Roth IRA due to income limitations… This backdoor maneuver lets you convert traditional IRA contributions to Roth, enjoying tax-free growth later.
6. Mega Backdoor Roth for High Earners: Feeling fancy? If your employer allows, contribute even more to your retirement through these special contributions. These get very in depth we recommend using pros for this.
7. Roth Conversions: Consider converting some pre-tax retirement savings to Roth. You'll pay taxes now, but future withdrawals will be tax-free, potentially saving you money in the long run.
8. Standard Deduction or Itemize Deductions: Crunch the numbers! Depending on your expenses, itemizing deductions like mortgage interest, medical bills, and charitable donations this might save you more than the standard deduction.
9. Charitable Giving Bunching: Donate strategically! Bunching multiple years' worth of charitable contributions into one year allows you to itemize in that year and maximize your deduction.
10. Stock Options at Work: Navigating employee stock options can be tricky. Do your research, understand the vesting schedule, and consider diversifying your holdings to avoid overexposure and lowering your tax liability.
11. Asset Location: Where you hold your investments matters. Place certain investments in specific accounts for tax savings. For example; ordinary income taxable investments typically should not be held in a non-retirement account. You’ll also want to take advantage of tax-loss harvesting.
12. Asset Allocation: Don't put all your eggs in one basket! Diversify your investments across different asset classes to manage risk and strive to optimize returns.
Remember, this checklist is just a starting point. Consult a financial advisor to tailor these strategies to your specific situation, goals, and tax brackets. The key is to take action!
Disclosures
No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Asset allocation and diversification does not ensure a profit or protect against a loss
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
AI sourced articles may be prone to error, due to the vast information they assemble from the internet.
Sources: https://www.irs.gov/retirement-plans/ira-deduction-limits
https://www.irs.gov/taxtopics/tc409