May 22nd, 2018

Managing expenses to reduce your tax liability is a critical component of your comprehensive tax minimization strategy. However, this isn’t the only options for getting through the tax maze with your wealth intact. If you are truly committed to keeping your taxes low, it is time to explore tax-deferred and tax-free income opportunities.

The Tax Ramifications of Popular Savings and Investment Accounts

Dramatic stock market gains can pad your account nicely, but the tax ramifications of an investment windfall can be shocking. Without proper planning, a significant portion of your earnings will go to the IRS.

Consider the most common account types and how they are taxed:

  • Savings Accounts – Taxed as interest income
  • Money Market Accounts – Taxed as interest income
  • Certificates of Deposit (CDs) – Taxed as interest income
  • Mutual Funds – Taxed on dividends, capital gains, or both
  • Stock Trading Accounts – Taxed on dividends, capital gains, or both

Clearly, saving and investing through these types of accounts can get expensive, offsetting the benefits of your carefully planned investment strategy. Fortunately, there are a variety of investment opportunities available that allow you to take advantage of exciting developments in the market without dramatically increasing your tax bill.

Opportunities for Tax-Advantaged Investments

The first step in bringing your taxes down is to examine your options for participating in tax-advantaged retirement savings programs. These accounts are designed to encourage long-term financial planning, and any of the account types listed above can be incorporated into your strategy. Some of your options, such as a Traditional IRA and 401(k) offer deferred taxation, allowing you to pay taxes later when you are likely to be in a lower tax bracket. Other options, such as the Roth IRA, require you to pay taxes on your contributions now, but your earnings grow tax-free.
Of course, these programs have detailed eligibility requirements, and there are caveats when it comes to how much you are able to contribute, as well as when you can or must take distributions. Your Certified Tax Coach and your retirement planning specialist will provide the support and guidance you need to choose the options that will get you to your financial goals.

Less Common Investment Options

No tax-deferred or tax-free income strategy is complete without careful consideration of less common investment options. Once you have examined how best to minimize taxes on your standard savings and investment accounts, determine whether an annuity or whole life insurance policy makes sense for you. As your Certified Tax Coach will explain, annuities often feature tax deferrals, but that isn’t the only benefit you will enjoy. These products are designed to ensure you will not outlive your income – a real fear with lifespans increasing and guaranteed income programs shrinking.

Setting money aside through the use of standard banking products simply isn’t enough if your goal is to increase your wealth and decrease your tax liability. Maximizing your savings and investments requires careful planning. When you focus on tax-deferred and tax-free income opportunities, you ensure that your earnings aren’t eaten up by IRS payments. Advanced tax planning helps you make it through the tax maze with minimal liability. Get the information you need to choose the tax-advantaged and tax-exempt programs that best fit your long-term goals. Click here to find an advisor certified in tax planning to help today.