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Tax Management

Taxes are a necessary part of life, but they don’t have to be such a burden. There are various tax management and preparation techniques and methods that can be used to reduce the amount of taxes you pay and optimize the deductions and credits available to you, both today and in the future. While CPAs and tax planners are an essential part of tax planning year-to-year, it is also important to consider the long-term taxable effects of your investment and retirement savings decisions. In doing so, you may set yourself up to have enormous tax control in retirement when you likely will need it most.

Tax-Free Income

Tax-free income is the ability to withdraw from federally qualified accounts in retirement without those withdrawals triggering ordinary income tax. Because we don’t know how future tax policy will change, having tax free income give you the flexibility to deal with the ever changing tax policy of Federal, State and Local authorities and provides you with a place to secure money when unexpected expenditures pop up – without complicating your tax filing.

The IRS obviously prefers that all accounts be taxable at some point, so your options to receive tax free earnings are limited. Currently you have the option of investing in municipal bonds; whose dividends are federally tax free. Some municipalities offer bonds that are exempt from both state and federal taxes. This bond interest does show up on your tax forms, which does make it count against what portion of Social Security may be taxes.

Second are distributions from Roth IRAs, which allows more flexibility to invest in a variety of investments. There are some limits to accessing the money tax-free so you have to have planned ahead to have any substantial source of tax free income from this method, and Roth IRA contributions are not allowed for those above certain MAGI income limits.

A third, and often overlooked, way of developing tax free earnings is to utilize cash value life insurance. Many permanent life insurance policies accrue accessible cash value within the policy that can grow year-over-year by way of an index, dividends from the issuing company, or a stated interest rate. This growth can be accessed without the assessment of taxes if the distribution follows basic IRS rules for tax-free distributions from life insurance.

Tax Deferral

Tax deferral is a tax status that can be applied to certain account types or investment products. When a tax-deferred investment grows, the investor does not have to pay capital gains taxes on that growth every year. In other words, the taxes are deferred until the funds are withdrawn. This deferral allows the growth to compound on itself over time instead of having to pay a portion of gains to the IRS in the form of a tax.

The tax deferral strategy can benefit a financial plan by allowing the taxes to accrue while the investor would typically be in a higher tax bracket in their working years. When the investor withdraws and uses the funds in retirement, the idea is that he or she would be in a much lower tax bracket and save overall on their investment taxes. Tax deferral is available on a variety of employer-sponsored qualified plans (such as 401(k)s and 403(b)s), IRAs and non-qualified variable and fixed annuities.

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