ASSET LO-CATION TO OPTIMIZE AFTER-TAX STRATEGIES

by TC Falkner, CFP® 

Asset location means strategically placing asset classes (equities, fixed income, debt, etc.) in your portfolio, based on the tax treatment of the different types of accounts you have. The goal is to put investments in the right place to reduce taxes and maximize your after-tax returns.

From a tax perspective, there are three main accounts we utilize: 

1. Tax-free – think Roth IRA or Roth 401(k), in which the assets have already been taxed, so no matter how large the assets grow, they will never be taxed again The more growth we expect in an investment, the more we want it located in your tax-free account.

2. Tax-deferred – think of traditional IRAs and 401(k)s, SEP IRA, etc., which are not taxed until withdrawn. Because all distributions from tax-deferred accounts are taxed as ordinary income, with rates ranging from 10% to 37% (usually someone’s highest tax bracket), we want to move as many of the growth assets you own out of these accounts. 

3. Taxable – such as traditional brokerage and bank accounts, CDs, your home or other real estate, etc. After filling the tax-free bucket, we would place as many growth assets as possible in taxable accounts. This is generally advantageous because most investments are taxed at long-term capital gains rates, which currently are 0%, 15% or 20%.

When we work with clients, we focus on creating a well-balanced and well-diversified portfolio to support their overall financial plan. While it is important to make sure we have the right asset diversification, it is also important to optimize the many tax-efficient accounts that can help enhance returns and save thousands in taxes over a lifetime.

It’s the time of year to take advantage of tax-mitigation strategies

by Christopher R. McCrea, CFP® 

Here are four ways we help clients reduce taxes now or in the future, upon conversion or liquidation. These strategies require careful professional help to calculate, set up and convert, but more importantly to understand contribution limits, income limits, pro-rata pre-tax versus after-tax contributions, and changes for 2024.

1. Backdoor Roth IRA: This is best for high-earners who have reached the income limit on Roth contributions, i.e., $153,00 for single filers, $228,000 for married filing jointly. Put after-tax (non-deductible) money in a traditional IRA (thereby avoiding the Roth income limits), then immediately convert that contribution to a Roth IRA. The money in the Roth will continue to grow tax-free.
2. Qualified Charitable Distribution out of your IRA: Investors over age 70 1/2 can donate up to $100,000 from their IRA directly to a charity and avoid taxes on the amount donated. These donations can meet all or part of the IRA’s RMD for the tax year.
3. IRA to Roth conversion: If there’s room for additional earned income before triggering the next tax bracket, consider converting a traditional IRA to a Roth, and paying taxes on the earnings at the time of conversion, i.e., this tax year.
4. Roth or traditional contribution and catch-up contribution: Make a $6,500 contribution to your Roth, plus a $1,000 catch-up contribution if over the age of 50. For married filing jointly that’s $15,000 that will continue to grow tax-free or tax deferred.

As part of our active management of your portfolio, we consider tax strategies throughout the year. As part of your financial plan, we are here to guide you through the complex IRS rules*, and manage your accounts to take advantage of available strategies.

*Ultimately, it is essential to consult a tax professional or tax advisor who is well-versed in tax rules and regulations, can provide personalized guidance based on your specific situation and help you navigate the complexities of tax.

by TC Falkner, CFP® 

Tax planning is one of the most important aspects of your financial plan. Ensuring that you, your family, and your business have proven strategies to save on future taxes is key. Plus, tax laws change every year, so we are here to help keep you up to date.

The more in-depth tax planning strategies we help with go beyond a single tax year. To name a few:

• Making decisions on contributing to a traditional tax-deductible account versus a Roth account (IRA or 401k). 
• Contributing to a SEP or SIMPLE IRA through your business, using the deduction to lower taxes and save for retirement.
• Executing a Backdoor Roth IRA strategy to increase your “tax-free bucket” for retirement.
• Taking distributions from an IRA versus a Roth IRA or taxable account to better control taxable income each year.
• Careful timing of Required Minimum Distributions from your IRA.
• Charitable giving strategies, such as a Donor Advised Fund or Qualified Charitable Distributions, which can save thousands in taxes with money you were already planning to give away.

We ask every one of our clients to send us a copy of their tax return so we can work with you and your tax professional to implement an efficient tax strategy. We don't file your tax returns, but we are here to provide you with a comprehensive overview of your finances so more of your money is going where you want it to go.