Can I tell you what would be really nice when it comes to tax planning?
If we could just know exactly how much money you were going to make over your entire career and exactly what the tax rate would be over your lifetime. If we only knew all the unexpected expenses that would come up in your retirement. While we’re at it… if only we knew your date of death too. Then I could truly put together the most perfect retirement projection and tax plan for you…
That’s not reality though, is it?
When it comes to planning your wealth and planning for taxes, there are so many unknowns. Your life will bring many twists, turns, surprises, and everything else in between.
Although we don’t know what the future holds, we can still be intentional with how we plan for it. What we do know is that taxes are complicated, and they seem to be getting more complex every single year. Together we can help you stop playing defense with taxes and instead get on the offensive team.
If you’re a wealth accumulator: meaning you’re in your 30’s, 40’s or 50’s and you are building your wealth right now.
- Build tax diversification: Utilize your pre-tax 401(k), Roth (post tax) retirement accounts and your brokerage account. Having tax diversification in retirement can be your best friend.
- Know your current tax rate: This can help you determine where to contribute your money. Are you an ultra-high earner? It may be a good idea to max out your pre-tax retirement account to get a tax deduction right now. Are you new in your career and expect to be making more in the future? Great, maybe it’s best to put money in your Roth IRA now.
- Understand your tax burden: The last thing we want with taxes is a surprise! Work to understand what your income is, what your marginal tax rate is, and how much you will owe. Then, align it with your withholding or estimated taxes.
- Work with a professional: Maybe you’ve reached a point where you have a lot of complexity. Now is a perfect time to engage with Bloom Wealth Advisors, and also to get a CPA to handle your tax filing.
If you’re nearing retirement: Work is just about to be optional for you and you’re wondering, how exactly am I going to use my wealth to live on?
- It’s time to get a clear understanding of your spending and how much you want to spend when you are no longer working. Once we understand that, we can help develop a plan for how we will utilize your investment portfolio to continue living the lifestyle you want. Not quite there yet? Now is the time to make tweaks to either your spending, your saving, or your retirement date.
- Build more tax diversification: If retirement is near, we really need to look at what tax diversification you have. Many retirees have the majority of their wealth in a pre-tax retirement account like your 401(k). Now is the time to build up more tax diversification by adding to your brokerage accounts or Roth assets. This will help you with having more options in the distribution phase.
- Plan for future changes to your income: If you’re about to retire, chances are your income could be lower (at least for a little bit- more on that later) and now is the time to be planning for lower income years. If you have a lot of highly appreciated stock, or maybe you want to sell your rental property, strategically waiting to sell until you’re in retirement could be advantageous.
- Project out your future tax burden: Guess what, when you hit a certain age, you’ll be forced to withdrawal money (sometimes huge sums of money) from your pre-tax retirement accounts, which can greatly impact your future taxes. Now is the time to start really planning for it.
If you’re a retiree: Congrats, work has become option for you and now you’re probably living off your portfolio or thinking about it.
- Create a lasting distribution strategy: This is the hard part of managing your wealth in retirement, and this is exactly how we help our retired clients. Which accounts do you draw from and when? How does it impact the big picture? How will my taxes change?
- Project out your required minimum distributions (RMDs): For the first time ever, we are seeing massive IRA accounts. This may seem great, but it also means higher RMDs and higher taxes in the future. Let’s project out what your anticipated RMDs are, not just when you’re 75, but when you’re 90. This can help us be on the offence and not be surprised down the line.
- Utilize strategies like Roth Conversions: In early retirement, prior to RMD age, you may be in low income years where we can move money that is taxable (in your IRAs) into a Roth, that is tax free for the rest of your life. With a careful and thoughtful strategy, we may be able to help you lower your lifetime tax burden so more of your wealth goes to you, not the IRS.
- Consider Medicare premiums: Your Medicare premiums are determined by your income two years prior. When you’re executing tax strategies, it is vital that you take into account how much in Medicare premiums you’ll be paying. Executing too much of a Roth conversion could drastically impact your monthly expenses two years later. There are a lot of moving parts – we know, that’s why we should be thoughtful with our strategies.
Every point I mentioned in this article is something we think about here at Bloom Wealth Advisors. What I want most for our clients is to get to enjoy their hard-earned money. I want more of your money to go to you, your life, your family and the organizations you care about. Without proper tax planning, you may be paying more in taxes than you need to. Let’s plan together.
If you’re a high earner, if you have a large pre-tax retirement account, if you have a business, if you have highly appreciated stock…. You probably have tax complexity. Let us help!
