By The Galecki Financial Management Team
You likely wouldn’t willingly give away your money without a good, logical reason; yet that’s precisely what happens when we miss opportunities to optimize our tax savings strategies. Reducing tax liabilities is a powerful way to preserve your wealth that extends beyond the annual tax day rush. Ongoing tax planning is a proactive strategy that allows you to strategically reduce your tax bill—which means the IRS won’t take more than its fair share of your money.
Understanding the rules of any game increases your chances of winning. The same principle applies to tax laws. When you understand the intricacies and benefits of tax laws, you’ll increase the likelihood of “winning the game” by minimizing your tax liability. Here’s how you can make that happen.
Build a Tax-Efficient Retirement Plan
When working with your financial advisor, retirement planning will often be a key point of conversation. By stress-testing your plan, you can quickly see if your current retirement accounts, savings rates, and other assets will be adequate for the retirement lifestyle you desire.
A direct way to reduce your tax bill is to contribute money into tax-deferred savings accounts, such as a 401(k) or IRA. But, in order to maximize your savings, you will need to determine both your current cash flow needs and your ideal retirement income. A proper financial plan will look at both factors and determine the best way to use your tax-deferred savings accounts to save you money both now and in the future.
For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. Creating a tax plan can help you strategically withdraw from your various retirement accounts and reduce your tax liability.
Contribute to Your Health Savings Account
Health savings accounts (HSAs) offer triple the tax savings. This may sound too good to be true, but HSAs have no federal income tax, no state or local taxes, and no Federal Insurance Contribution Act (FICA) taxes. If you are eligible for an HSA, your money will be tax-deferred and can be withdrawn tax-free to pay for medical expenses.
Because HSA account balances roll over from year to year, by contributing to the limit each year, you can build up quite a nest egg to cover either current medical expenses or future medical expenses in retirement. Think of it as a Roth IRA for medical expenses.
In 2024, HSA owners will have higher contribution limits to help them do just that. If you have individual coverage, you can contribute $4,150; for family coverage, the limit is $8,300. There is also an extra catch-up contribution of $1,000 available for those age 55 and older. If you can’t max out the yearly limit, attempt to contribute enough to cover your deductible and take advantage of your employer match, if available.
Use a Roth IRA to Transfer Wealth
Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Although Roth IRAs don’t have RMDs, other accounts like a traditional IRA might. This will force you to increase your income and could bump you up to a higher Medicare range, which can add $100 to $150 each month in premiums.
You probably know the effects taxation can have on your assets and the inheritance you hope to pass on to future generations. For example, if you passed down a traditional IRA, non-spouse beneficiaries used to be able to stretch the distributions from that account over the beneficiary’s life, but now they have to liquidate the account within 10 years of inheriting it (with some exceptions), thanks to the SECURE Act. This significantly decreases the value of the account due to the amount of taxes paid in a short time. But, if you pass down a Roth IRA instead, there is no income tax due on the distributions, as long as the account is held for more than five years and the account holder is 59½ or older.
If you have traditional IRAs already or earn too much to qualify for a Roth IRA, consider a Roth conversion to remedy the tax loss. The basic process to convert your IRA is to withdraw the amount you’d like to invest in a Roth, pay the tax owed on the distribution, then reinvest it into a Roth account. Be sure to work with a professional to determine the best time to do this so you don’t push yourself into a higher tax bracket or are forced to use funds from the account to pay the extra taxes on the distribution.
Deduct Eligible Charitable Contributions
Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction. Under the Tax Cuts and Jobs Act, fewer taxpayers itemize deductions due to the doubling of the standard deduction. Regardless, charitable giving is still a useful tax-minimization strategy.
In order to benefit from charitable giving, you’ll have to plan ahead. With the new higher standard deduction, you’ll need to make sure your total deductions for the year, giving included, exceed $14,650 for an individual filer and $29,200 for those married filing jointly. If your deductions fall below this amount, consider bunching your giving or doing several years’ worth of giving in one year.
You may also want to look into using a donor-advised fund to combine all charitable contributions in a year and then distribute the funds to various charities over several years. With this strategy, you may be able to itemize deductions in one year and take the standard deduction in the following years so you can achieve a tax benefit that you may not have received otherwise.
For individuals over age 70½, you can also give to charity directly from your IRA. This is called a qualified charitable distribution (QCD). Funds given in this manner are free from any income tax. Once you are age 73 (or age 75 if born in 1960 or later), the IRS requires you to take a distribution from your IRA. This is called a required minimum distribution (RMD). Giving funds from your IRA as a qualified charitable distribution helps satisfy your RMD while avoiding the income tax. In 2024, the maximum amount each taxpayer can give as a QCD is $105,000. Married filing jointly taxpayers can give a total of $210,000 ($105,000 from an IRA in each spouse’s name).
Review Your Previous Tax Returns
You can learn a lot from the past. Look at your previous tax returns with a professional to search for deductions or credits you may have missed, opportunities to lower taxable income, and plan for the next tax season. Take these factors into consideration when making a tax plan for the future:
- Review notable tax law changes for 2024 that may affect you
- Review your capital gains and losses
- Review your retirement savings options
- Consider Roth IRA conversions
- Consider additional year-end tax strategies
- Understand potential tax law proposals
Get Started Today to Save
Strategic tax planning has the power to generate immediate savings while moving you toward a prosperous financial future. A key factor is partnering with a seasoned professional who can analyze each opportunity to determine if it aligns with your overall strategy and long-term goals.
As Fee-Only advisors in Fort Wayne, Indiana, the Galecki Financial Management team has decades of experience in financial and tax planning, which enables us to seamlessly integrate tax-minimization strategies to enhance your savings. If you’re interested in learning more about these tax-saving approaches and how they could benefit your specific situation, feel free to initiate an introductory meeting by calling (260) 436-8525 or emailing [email protected].
About Galecki Financial Management
At Galecki Financial Management, we help individuals and families confidently pursue their financial goals. We’re anything but a business-as-usual wealth management firm. We’re different. Friendly. Casual. And really good listeners. Indeed, that’s a big part of what makes us different. Everything we do is based on what we hear from you, because our experienced team of professionals specializes in comprehensive financial planning, cash flow analysis, IRA rollovers, financial services, money management, estate planning, retirement planning, and advising. We help you identify your short- and long-term goals, and then we work together to pursue them. Lastly, and most importantly, we’re Fee-Only, meaning we’re only compensated for our time. Our only incentive is to help you succeed.