How a Financial Advisor Can Help You Pursue Tax-Smart Strategies

They say there’s no such thing as a free lunch, but what about a tax-deductible lunch? While many of your income sources can be taxed, there are strategies to help minimize your overall tax burden before and in retirement. An advantage of going to one professional for all of your financial planning needs is that everything from investment strategies to estate planning works together in one overall plan. Here’s how a financial advisor can help you pursue tax-smart strategies.

Manage Investments with a Tax-Smart Strategy

Every part of a financial plan is connected, including an investment strategy and a tax minimization strategy. It can be important to factor in your tax burden when realizing investment gains, selling property, and withdrawing from a traditional IRA or 401(k), especially if we see higher tax rates in the future. There are many tax minimization strategies an advisor can help you consider, each unique to your individual situation. Unlike an accountant who tries to reduce your tax burden on a year-to-year basis, an advisor can help you create a long-term tax minimization plan that lasts throughout retirement.

Respond to Tax Policy Changes

A larger tax burden is a major retirement challenge to overcome, especially for the first generation of retirees with a lot saved in tax-deferred retirement accounts. The Biden administration’s proposed tax changes include several potential tax-increasing measures for certain individuals: The top marginal income tax rate would go from 37% to 39.6%, and the long-term capital gains rate of 20% for those making over $1 million would disappear. This means that capital gains would instead be taxed at 39.6%, plus the additional 3.8% Obamacare tax.[1] We could also see an end to the step-up in basis, which would potentially mean a much more significant tax burden for beneficiaries. An advisor can help you update your tax minimization plan and estate plan if we see these changes.

Create a Long-Term Strategy for Retirement Accounts

If you’ve saved a substantial amount in your 401(k), IRA, or other retirement account, it’s important to have a withdrawal strategy. Deciding how much to contribute, which kind of plan is best for you, when to start withdrawing, and whether to utilize a Roth IRA are all important decisions a financial advisor can help you make. Starting at age 72, you will most likely have to take Required Minimum Distributions (RMDs) from your traditional retirement plans. This can cause you to withdraw more than you want to in a year, potentially increasing your tax burden. When it comes to taxes, plan for your future self. This includes having a strategy for taking RMDs.

At SHP Financial, we can help you fit all the pieces of the puzzle together with an income and tax-minimization plan. We can help you figure out which income sources to draw on and when to do so, how new sources of income could affect your tax burden, and how to help reduce taxes on your heirs. Click HERE to sign up for a complimentary review where we can assess your tax burden.