Tax Planning As Part Of Your Financial Plan

Tax planning is an essential part of a comprehensive financial plan. Comprehensive financial plans are designed to achieve your individual goals through cash management of your income and expenses, investing, retirement planning, educational savings for children or grandchildren, risk management (insurance), and estate planning. Each of these components can be affected by taxation, and thus every comprehensive financial plan needs tax planning.

What is tax planning, exactly? Tax planning is the analysis of all the multiple components of your financial planning with the goal of helping you pay the least amount of tax possible. Tax planning makes your financial life tax efficient. The ultimate goal of tax planning is to optimize your achievement of goals by minimizing taxes and thus maximizing your income streams.

Tax Planning Strategies

A San Antonio financial advisor achieves tax planning with multiple strategies, all designed to achieve your financial goals within the context of long-term financial planning

Below is a brief explanation of some common tax planning strategies.

  • Contributing to tax-advantaged retirement funds

Tax-advantaged retirement funds contribute to tax efficiency in several ways. First, they can lower your taxable income. A traditional 401(k) or similar defined contribution plan entails pretax contributions, so the amount you contribute is not taxed at all in the year of contribution. For 2024, an individual can contribute up to $23,000. Folks who are 50 years old or older can contribute an additional $7,500. 

Traditional Individual Retirement Accounts (IRAs) contributions are tax-deductible rather than taken pretax. They lower your overall taxable income for the year. For 2024, you can contribute up to $7,000, with a catch-up contribution of an additional $1,000 for those 50 and over.

Second, the funds in both traditional 401(k)s and traditional IRAs appreciate tax-free until you withdraw the funds at retirement.

  • Lowering your taxable income

Lowering your taxable income is tax efficiency in action. The lower your taxable income, of course, the less tax you pay. In addition, of course, tax brackets are determined by one’s income, so tax planning can lower your tax bracket as well. The lower your tax bracket, the smaller the percentage you will be taxed on your taxable income. 

Your financial planner can advise you on the best strategies for your situation. Besides retirement savings, these may include charitable giving to organizations that have the proper designation from the Internal Revenue Service (IRS) for donations to be tax-deductible, or to family members. (Charitable giving can also be done, of course, in accordance with Biblically Responsible Investing principles and with your beliefs and values.) Charitable giving can include donations of cash, items, or appreciated securities.

Savings for qualified healthcare expenditures through a Health Savings Account (HSA) can also lower your taxable income. If your healthcare plan makes you eligible for an HSA, you can contribute up to $4,150 (for yourself) and up to $8,300 (for a family) in 2024. People aged 55 or over can contribute an additional $1,000 per year. These amounts can roll over from year to year as well.

A Texas financial advisor or accountant can advise you on other moves to lower your taxable income, which include itemizing deductions, planning retirement withdrawals, investing in tax-free bonds and other tax-advantaged asset classes, moving to regions with lower tax structures, and more.

  • Tax gain/loss harvesting

Tax gain/loss harvesting refers to using tax losses to minimize capital gains taxes. Currently, the Internal Revenue Service allows taxes on capital gains to be offset by capital losses. This is a complicated strategy that can include planning the sale of any assets that will trigger capital gains or losses to realize efficiencies in a given year. 

The Importance of Timing and Long-Range Planning

Tax planning is often very intertwined with timing and long-range planning. That’s true of all tax-efficient strategies, including lowering taxable income and charitable contributions. It’s therefore very important to work with a financial advisor in San Antonio who can add your goals and time frame to their knowledge of your financial life to maximize tax efficiency.

Retirement planning and taxation give a particularly strong example of this. It could be that you would like to pay as little tax as possible in retirement. Alternatively, it could be that you’d rather pay some tax in those years as opposed to peak earnings years because you expect your retirement income to be lower and thus your tax bracket lower. One method of managing these preferences is your investment in tax-advantaged retirement funds.

As we discussed above, both traditional 401(k)s and traditional IRAs lessen your income in the year of contribution, by being tax-free or tax-deductible, respectively. Each type of contribution grows tax-free until it is withdrawn. When funds are withdrawn, they are taxed at your current rate. (Note that the IRS will also levy a tax penalty of 10 percent if these funds are withdrawn before you turn 59½.)

But there is a method to lessen your taxes upon retirement if that provides you with the maximum tax efficiency. Roth 401(k)s and IRAs are quite different from traditional vehicles in the timing of their tax advantages. If you contribute to a Roth 401(k) or IRA, you don’t receive any immediate tax advantage – the money is taxed in 401(k)s and is not deductible in an IRA. It does grow tax-free.

Importantly for your planning, contributions withdrawn from a Roth 401(k) in retirement are not taxed at all, because the money has already been taxed. The same is true for contributions to Roth IRA accounts withdrawn upon retirement or after 5 years. Planning a mix of traditional and Roth retirement accounts is therefore a potentially powerful tool in tax efficiency, depending upon your expected income and tax bracket now and in retirement.

Changes in Tax Planning

Your tax planning, like other financial planning, should be reviewed regularly to ensure the maintenance of peak tax efficiency and to take into account changes in your goals, income, and circumstances.

In addition, of course, tax laws and regulations change frequently. Working with financial planners and with tax professionals will ensure that your plans stay abreast of any and all changes.

PAX Financial Group: Comprehensive Financial Planners

At PAX Financial Group, we specialize in helping high-net-worth individuals who want their financial lives to reflect their strong Judeo-Christian values. We will work with you to understand your goals, beliefs, and objectives. Contact us to discuss tax planning as part of an overall comprehensive plan.

This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Biblically Responsible Investing (“BRI”) involves, among other things, screening for companies that fit within the goal of investing in companies aligned with biblical values. Such screens may serve to reduce the pool of high performing companies considered for investment. Investing involves risk. BRI investing does not guarantee a favorable investment outcome. PAX Financial Group has conducted due diligence for their Biblically Responsible Investing (BRI) process and proudly serves as each client’s advocate using fully vetted third-party specialists for the administration of BRI methodology. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product and should not be relied upon as such.

Ready to have a real conversation about securing your future?

Schedule a free no-strings-attached phone conversation.