Tax planning plays a significant role in financial planning for high-net-worth individuals. One of the roles of tax planning is to ensure that you pay the lowest amount of tax possible, to maximize your share of the income you receive.
Another equally important role over time — and one families perhaps think less about — is to set your family up with a wealth creation structure that includes shielding your assets from taxation, for you, your family, and your estate, in the future, potentially decades from now.
Here is a brief outline of advanced tax planning ideas that can minimize taxes and thus power wealth creation through time.
Tax-Advantaged Retirement Plans
Tax-advantaged retirement plans are one of the most commonly used tax strategies, but it’s important to know their more sophisticated uses as part of financial planning in San Antonio, Texas.
Find out how tax planning is part of a long-term financial plan and how PAX Financial Group can help!
Deferred contributions plans such as traditional 401(k)s lower your overall tax by reducing your income before taxes are withheld. For 2024, the maximum contribution is $23,000. Contributions are tax-free until you withdraw them at retirement. In addition, many employers offer a match on 401(k) contributions, which provides additional money toward your retirement.
Traditional Individual Retirement Accounts (IRAs) lower your overall tax by providing a tax deduction, lowering your taxable income for the year. Assets in these accounts, too, are tax-free until you withdraw them at retirement.
Investing in Roth 401(k)s or Roth IRAs will affect your tax situation differently than investing in the traditional version of these vehicles. While the yearly investment limits and the ability of those investments to grow tax-free remains the same, Roth contributions for 401(k)s are made after-tax rather than pretax and Roth contributions for IRAs do not provide a tax deduction.
Instead, the tax advantage for Roth retirement accounts kicks in when you retire. Because they were subject to taxation in the year of contribution, they are not taxed when you withdraw them in retirement.
The variable tax picture of traditional and Roth accounts allows you and your Texas financial advisor to craft a tax strategy that lowers your taxes when your income is projected to be the highest, depending on your goals, retirement timeline, and expected tax bracket.
HSAs and FSAs
Health Savings Accounts (HSA) are available if you have a high deductible healthcare plan. HSA funds are taken out pretax, so lower your income. HSA funds can also be invested in a number of asset classes, such as stocks and bonds. Essentially, they are a tax-advantaged investment, but one that can be used for healthcare expenditures.
Importantly for tax and wealth creation purposes, the funds in an HSA can be rolled over year over year until the end of your life. There is also no date by which the funds have to be withdrawn, unlike tax-advantaged retirement plans. Your investments within it are tax-free until withdrawal.
HSAs enjoy a triple tax advantage. Not only are the contributions and appreciation tax-free, but the withdrawals are tax-free as well, as long as they are for qualified medical expenses.
If you aren’t eligible for an HSA but have access to an FSA, contributing to one will also lower your pretax income. FSA funds can be used for qualified healthcare expenditures. FSA funds must generally be used within a defined period of time, such as a year or 18 months; they do not roll over.
Charitable Contributions
Charitable contributions are an excellent way to give to a worthy organization or cause of your choice. There are also multiple tax strategies associated with charitable giving.
Individuals can donate up to 60 percent of their adjusted gross income (AGI) to a qualified charity. You can also donate appreciated assets, including stocks and real estate. Both these donations are tax-deductible in the year of contribution.
Several charitable giving methods allow you to both receive tax advantages while drawing income from your assets.
The first is a Charitable Remainder Trust (CRT). Setting up a CRT allows you to give appreciated assets to a charity while you also receive income from it (as can your beneficiaries), either for a defined period or for life. The CRT receives the donations and sells them tax-free. It then invests the assets and sets up an income stream for you. The tax advantages include removing assets from your net worth and avoiding capital gains taxes on the donated assets. After the demise of the beneficiaries receiving the income stream, funds remaining in a CRT are donated to the charity.
The second is a charitable gift annuity (CGA). With a CGA, the charitable organization receiving a sizable donation will pay you a fixed annual income for the rest of your life. Both a portion of the gift you give the charity and the annuity payments to you are tax-advantaged.
Estate Planning
One way of shielding your income from income, estate or gift taxes is to bequeath money to your intended beneficiaries before you pass away. The IRS allows individuals to gift other individuals $18,000 tax-free each year. If you intend to bequeath $1 million to each of four grandchildren, for example, you could begin by gifting amounts year by year.
Trusts
There are several different types of trusts that can shield you and your beneficiaries from taxes while transferring your assets to beneficiaries.
One example is a Qualified Personal Residence Trust (QPRT), which can be used to pass on the ownership of both homes and vacation homes to your children. A QPRT can be set up so that you have the right to continue living in the home either for life or for a defined number of years. After this period, the ownership passes to your children.
The value of the home is eliminated from your estate, which can reduce or eliminate gift and estate taxes.
Contact PAX Financial for Tax Planning Advice
At Pax Financial Group, we can plan sophisticated tax strategies that can minimize your taxes, and shield and grow your wealth both now and in the future. Our tax planning is designed to harmonize with your long-term financial goals, values, and comprehensive financial plan.
