Tax policy changes often, leaving many wondering: How does that affect me? What can I do? What does savings have to do with it?
But trying to predict what may happen to your future taxes and savings is a lesson in spinning plates – you never know what plates drop first. Here are some tips on ways to take advantage of what we do know about taxes and savings.
5 Tax-Optimized Savings Tips
From Roth conversions to estate planning tricks, there are plenty of moves you can make today to save on taxes and boost your savings.
#1. Try Out Roth Conversions
Individuals pay ordinary income tax when converting a traditional IRA to a Roth IRA. Roth IRAs are taxed when you put money into the account, but are tax-free upon withdrawal in retirement.
But remember, the fair market value of the securities or cash becomes income for the year on the day the conversion is recorded. Basically, any money you convert is counted as money you earned that year. Depending on your income and tax bracket, this could help you save money in the long-term.
There is no longer an income limit on conversions, so anyone with IRAs can convert. Because it may push you into a higher income tax bracket, conversions should be discussed with a tax professional before you make any major moves.
Another bonus of Roth conversions? The earlier you convert, the longer the assets have to grow – so don’t wait too long!
(Want to learn more about Roth conversions? We’ve got you covered.)
#2. Explore Municipal Bonds
Consider municipal bonds as a tax-free income possibility. Even if you aren’t in high tax brackets, a municipal bond gives you a low-risk option for earning a little more on your investments.
Bond rates are lower than they have been in a long time so this is definitely a strategy to lower taxable income and to diversify your fixed income portfolio. While this may not lead to higher income, it can still result in less overall volatility.
#3. Revisit Your Asset Allocation
If your portfolio isn’t being rebalanced it can cause your financial plan to become weaker – and there may be missed opportunities to look at capital gains and losses for more favorable tax treatment.
As part of your review process, remember to align your portfolio with your goals. The best thing to do is bring your 1040 or tax forms with you to your next review meeting. Let your tax professional know who your advisor is and vice versa so they can work together to build a plan for the future.
#4. Jump Into Estate Planning
Revisit your estate plan. If you don’t have a plan, let’s discuss where you are and if you need one. Estate laws vary by state, so it’s important to find an advisor who’s knowledgable about your options.
For example, Oregon has a very high tax rate for estates over a million in assets.
#5. Start Early
Lastly, don’t let the tail wag the dog when it comes to savings. “Save early, save often” is good advice and leads to having a solid financial plan. This becomes a better plan for dealing with uncertain times and creates a stronger estate plan.
Taxes and savings can work in your favor, but you must be proactive in finding out what works best for you. Dive into even more tax tips here.