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Building Wealth Through Tax Planning Strategies

Building Wealth Through Tax Planning Strategies

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You have worked hard to accumulate wealth, but if you’re not careful, taxes can eat away at your hard-earned money. That’s why tax planning strategies are an important part of your wealth management plan. Here are some tips to help you address your tax burden and keep more of your money.

  • Start with a comprehensive plan: Implementing tax planning strategies is an ongoing process, so it’s essential to have a comprehensive plan that considers your short-term and long-term financial goals. A comprehensive strategy should also consider potential changes in tax laws and regulations that could affect your tax liability.
  • Evaluate your retirement contributions: Contributing to your retirement accounts can potentially affect your taxable income. For example, you can contribute up to $22,500 to your 401(k) or 403(b) plan in 2023, and if you’re over 50, you can make an additional catch-up contribution of $7,500. Contributing to a traditional IRA or a Roth IRA is another way to potentially reduce your taxable income.
  • Consider tax-efficient investments: Some investments are more tax-efficient than others. For example, municipal bonds are tax-exempt at the federal level, and some are also exempt from state and local taxes. Tax-efficient funds that invest in stocks with low turnover can also reduce your tax liability.
  • Take advantage of tax-loss harvesting: Tax-loss harvesting involves selling investments that have lost value to offset gains in other investments. This strategy can help you lower your tax bill and potentially rebalance your portfolio.
  • Work with a tax professional: Tax planning can be complex, so it’s a good idea to work with a tax professional who can help you navigate the process. A tax professional can also help you identify opportunities to reduce your tax liability and maximize your wealth.

Incorporating tax planning into your financial plan is critical to evaluate your tax needs over time, potentially reducing your tax burden and keeping more of your hard-earned money. Remember, tax-efficient planning is an ongoing process, so it’s essential to review your plan regularly to ensure that you’re taking advantage of all available tax-saving opportunities.

 

​The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Stratos Wealth Partners and LPL Financial do not offer tax advice or services.

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Facts about an IRA

Brush Up On Your IRA Facts

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If you are opening an individual retirement account (IRA) for the first time or need a refresher course on the specifics of IRA ownership, here are some facts for your consideration.

IRAs in America

IRAs continue to play an increasingly prominent role in the retirement saving and investment strategies of Americans. According to the Investment Company Institute (ICI), more than one third of U.S. households owned IRAs in 2017. Traditional IRAs, the most common variety, are held by more than one quarter of U.S. households, followed by Roth IRAs and employer-sponsored IRAs (including SEP-IRAs, SAR-SEP IRAs, and SIMPLE IRAs).1

Contributions and Deductibility

Contribution limits. In general, the most you can contribute to an IRA for 2018 is $5,500 and it rises to $6,000 in 2019. However, if you are age 50 or older, you can make an additional “catch-up” contribution of $1,000, which brings the maximum annual contribution to $6,500.

Eligibility. One potential area of confusion around IRAs concerns an individual’s eligibility to make contributions. In general, tax rules require that you must have compensation to contribute to an IRA. Compensation includes income from wages and salaries and net self-employment income. If you are married and file a joint tax return, only one spouse needs to have the required compensation.

With regard to Roth IRAs, income may affect your ability to contribute. For tax year 2018, individuals with an adjusted gross income (AGI) of $120,000 (goes up to $122,000 in 2019) or less may make a full contribution to a Roth IRA. Married couples filing jointly with an AGI of $189,000 (goes up to $193,000 in 2019) or less may also contribute fully for the year. Contribution limits begin to decline, or “phase out,” for individuals with AGIs between $120,000 and $135,000 ($122,000 and $137,000 in 2019) and for married couples with AGIs between $189,000 and $199,000 ($193,000 and $203,000 in 2019). If your income exceeds these upper thresholds, you may not contribute to a Roth IRA.2

Deductibility. Whether you can deduct your traditional IRA contribution depends on your income level, marital status, and coverage by an employer-sponsored retirement plan. For instance:2

  • If you are single and covered by an employer-sponsored retirement plan, your traditional IRA contribution for 2018 will be fully deductible if your AGI was $63,000 or less ($64,000 or less in 2019). The amount you can deduct begins to decline if your AGI was between $63,000 and $73,000 ($64,000 and $74,000 in 2019). Your IRA contribution is not deductible if your income is equal to or more than $73,000 ($74,000 in 2019).
  • If you are married, filing jointly, and the spouse making the IRA contribution is covered by an employer-sponsored retirement plan, your 2018 IRA contribution will be fully deductible if your combined AGI is $101,000 or less ($103,000 or less in 2019). The amount you can deduct begins to phase out if your combined AGI is between $101,000 and $121,000 ($103,000 and $123,000 in 2019). You may not claim an IRA deduction if your combined income is equal to or more than $121,000 ($123,000 in 2019).
  • If you are married, filing jointly, and your spouse is covered by an employer-sponsored plan (but you are not), you may qualify for a full IRA deduction if your combined AGI is $189,000 or less. The amount you can deduct begins to phase out for combined incomes of between $189,000 and $199,000 ($193,000 and $203,000 in 2019). Your deduction is eliminated if your AGI on a joint return is $199,000 ($203,000 in 2019) or more.
  • If neither you nor your spouse is covered by an employer-sponsored retirement plan, your contribution is generally fully deductible up to the annual contribution limit or 100% of your compensation, whichever is less.

Keep in mind that contributions to a Roth IRA are not tax deductible under any circumstances.

Distributions

You may begin withdrawing money from a traditional IRA without penalty after age 59½. Generally, previously untaxed contributions and earnings are taxable at the then-current regular income tax rate. Nondeductible contributions are generally not taxable because those amounts have already been taxed.

You must begin receiving minimum annual distributions from your traditional IRA no later than April 1 of the year following the year you reach age 70½ and then annually thereafter. If your distributions in any year after you reach 70½ are less than the required minimum, you may be subject to an additional federal tax equal to 50% of the difference.

Unlike traditional IRAs, Roth IRAs do not require the account holder to take distributions during his or her lifetime. This feature can prove very attractive to those individuals who would like to use the Roth IRA as an estate planning tool.

 

This communication is not intended as investment and/or tax advice and should not be treated as such. Each individual’s situation is different. You should contact your financial professional to discuss your personal situation.

1Investment Company Institute, “The Role of IRAs in US Households’ Saving for Retirement,” 2017.

2Internal Revenue Service, Notice 2017-64.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2018 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

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tax efficient investing

Tax Efficient Investing

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Five Strategies for Tax Efficient Investing

As just about every investor knows, it’s not what your investments earn, but what they earn after taxes that counts. After factoring in federal income and capital gains taxes, the alternative minimum tax, and any applicable state and local taxes, your investments’ returns in any given year may be reduced by 40% or more.

For example, if you earned an average 8% rate of return annually on an investment taxed at 28%, your after-tax rate of return would be 5.76%. A $50,000 investment earning 8% annually would be worth $107,946 after 10 years; at 5.76%, it would be worth only $87,536. Reducing your tax liability is key to building the value of your assets, especially if you are in one of the higher income tax brackets. Here are five ways to potentially help lower your tax bill.1

Invest in Tax-Deferred and Tax-Free Accounts

Tax-deferred accounts include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans, traditional individual retirement accounts (IRAs), and annuities. Contributions to these accounts may be made on a pretax basis (i.e., the contributions may be tax deductible) or on an after-tax basis (i.e., the contributions are not tax deductible). More important, investment earnings compound tax deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket. Contributions to non-qualified annuities, Roth IRAs, and Roth-style employer-sponsored savings plans are not tax deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you have held the account for at least five years and meet the requirements for a qualified distribution.

Pitfalls to avoid: Withdrawals prior to age 59½ from a qualified retirement plan, IRA, Roth IRA, or annuity may be subject not only to ordinary income tax, but also to an additional 10% federal tax. In addition, early withdrawals from annuities may be subject to additional penalties charged by the issuing insurance company. Also, if you have significant investments, in addition to money you contribute to your retirement plans, consider your overall portfolio when deciding which investments to select for your tax-deferred accounts. If your effective tax rate — that is, the average percentage of income taxes you pay for the year — is higher than 15%, you’ll want to evaluate whether investments that earn most of their returns in the form of long-term capital gains might be better held outside of a tax-deferred account. That’s because withdrawals from tax-deferred accounts generally will be taxed at your ordinary income tax rate, which may be higher than your long-term capital gains tax rate (see “Income vs. Capital Gains”).

Income vs. Capital Gains
Generally, interest income is taxed as ordinary income in the year received and qualified dividends are taxed at a top rate of 20%. (Note that an additional 3.8% tax on investment income also may apply to both interest income and qualified (or nonqualified) dividends.) A capital gain (or loss) — the difference between the cost basis of a security and its current price — is not taxed until the gain or loss is realized. For individual stocks and bonds, you realize the gain or loss when the security is sold. However, with mutual funds you may have received taxable capital gains distributions on shares you own. Investments you (or the fund manager) have held 12 months or less are considered short term, and those capital gains are taxed at the same rates as ordinary income. For investments held more than 12 months (considered long term), those capital gains are taxed at no more than 20%, although an additional 3.8% tax on investment income may apply. The actual rate will depend on your tax bracket and how long you have owned the investment.

Consider Government and Municipal Bonds

Interest on U.S. government issues is subject to federal taxes but is exempt from state taxes. Municipal bond income is generally exempt from federal taxes, and municipal bonds issued in-state may be free of state and local taxes as well. An investor in the 33% federal income-tax bracket would have to earn 7.46% on a taxable bond, before state taxes, to equal the tax-exempt return of 5% offered by a municipal bond. Sold prior to maturity or bought through a bond fund, government and municipal bonds are subject to market fluctuations and may be worth less than the original cost upon redemption.

Pitfalls to avoid: If you live in a state with high state income tax rates, be sure to compare the true taxable-equivalent yield of government issues, corporate bonds, and in-state municipal issues. Many calculations of taxable-equivalent yield do not take into account the state tax exemption on government issues. Because interest income (but not capital gains) on municipal bonds is already exempt from federal taxes, there’s generally no need to keep them in tax-deferred accounts. Finally, income derived from certain types of municipal bond issues, known as private activity bonds, may be a tax-preference item subject to the federal alternative minimum tax.

Look for Tax-Efficient Investments

Tax-managed or tax-efficient investment accounts and mutual funds are managed in ways that may help reduce their taxable distributions. Investment managers may employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends, and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.

Pitfalls to avoid: Taxes are an important consideration in selecting investments but should not be the primary concern. A portfolio manager must balance the tax consequences of selling a position that will generate a capital gain versus the relative market opportunity lost by holding a less-than-attractive investment. Some mutual funds that have low turnover also inherently carry an above-average level of undistributed capital gains. When you buy these shares, you effectively buy this undistributed tax liability.

Put Losses to Work

At times, you may be able to use losses in your investment portfolio to help offset realized gains. It’s a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized capital losses in a given tax year must first be used to offset realized capital gains. If you have “leftover” capital losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years, subject to certain limitations.

Pitfalls to avoid: A few down periods don’t necessarily mean you should sell simply to realize a loss. Stocks in particular are long-term investments subject to ups and downs. However, if your outlook on an investment has changed, you may be able to use a loss to your advantage.

Keep Good Records

Keep records of purchases, sales, distributions, and dividend reinvestments so that you can properly calculate the basis of shares you own and choose the shares you sell in order to minimize your taxable gain or maximize your deductible loss.

Pitfalls to avoid: If you overlook mutual fund dividends and capital gains distributions that you have reinvested, you may accidentally pay the tax twice — once on the distribution and again on any capital gains (or underreported loss) — when you eventually sell the shares.

Keeping an eye on how taxes can affect your investments is one of the easiest ways you can enhance your returns over time. For more information about the tax aspects of investing, consult a qualified tax advisor.

 

 

 1Example does not include taxes or fees. This information is general in nature and is not meant as tax advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

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