One aspect of financial planning that tends to get a lot of focus is how to mitigate the impact of taxes on your wealth. However, as one tax season comes and goes, implementing tax-efficient strategies in your financial plan tends to fall by the wayside. It’s as if once we get through the filing process, we breathe a sigh of relief, then immediately go back to business as usual.
There are so many different methods for you to maximize your money in a tax-efficient way. I recommend that you use this momentum that you have during tax season to take a careful look at your financial plan and investment strategies to ensure long-term tax efficiency and financial well-being. Remember, you are in charge of your money, and you have the power to influence how it gets spent – even when it comes to your taxes.
Finding Tax-Efficient Accounts
There are several tax-efficient ways you can save your money. That being said, saving money in tax-efficient accounts for the sole purpose of reducing your total taxable income doesn’t always make the most sense. Rather than seeking out tax-efficient accounts for your funds, it’s wise to take a step back and consider what your values are and what goals you’re looking to accomplish through saving.
One common financial planning practice that can be tax-efficient is your retirement savings. Accounts through your employer, such as a 401(k), 403(b), or 457 plan, take pre-tax funds out of your paycheck and set them aside for your retirement. Of course, saving for a comfortable retirement should be a financial planning goal on everyone’s radar, but taking a bit of extra time to set up your account and allocate your funds wisely makes all the difference.
Using a retirement savings account to lower your taxable income is an excellent way to maximize your current salary while simultaneously setting yourself up for future success. But it’s also important to focus on the risk you’re taking on in your portfolio.
While “day trading” is a romantic concept, it’s rarely a good idea if you’re looking to grow your wealth effectively. Instead, making sure that your retirement savings account focuses the bulk of your funds into passive investment vehicles (such as index and exchange traded funds) is one of the preferred ways to receive a good return on your investments in the long run.
Many companies offer the option to select the risk level you want in your retirement plan, but few people know what risk is actually right for them – or how their asset allocation should look to line up with the amount of risk they can take on at this point in their life. It’s worth checking into your portfolio periodically to make sure things are still trending in the right direction. Additionally, you can adjust your risk tolerance over time to take on progressively less risk as you near retirement – helping to reduce your overall risk.
HSAs and FSAs
Once you move beyond retirement planning, there are still several tax-efficient savings accounts for you to review. One option is to funnel some of your pre-tax income into a Health Savings Account (HSA) or Flexible Spending Account (FSA).
Like a retirement savings account, you can open these accounts through your employer and have a portion of each check go directly to them. These accounts are intended to support the cost of healthy living and out of pocket medical expenses. For example, you can use your HSA or FSA to pay copays at the doctor, cover hospital bills, purchase cold and flu medicine, and more. As long as your purchases are approved as a medical cost – these accounts are meant to cover them as you save over time.
This can be especially beneficial if you have a large medical expense coming up, or if you have regular doctor’s visits with small children. You can also use your HSA to save money for inevitable medical expenses during retirement or as you age – the money you contribute rolls over from year to year, so there’s no “spend it or lose it” fear.
With the new tax code, 529 plans can be used for more than just college education. If you are currently spending money on private school for your children, you can use the savings plan for those educational cost, as well.
All earnings from a 529 plan grow federal tax-free, and you won’t be taxed when you withdraw funds for your children’s education expenses. This kind of tax benefit is unmatched by nearly every other tax-efficient savings account (retirement accounts included). Additionally, 529 plans are a good way for you to prioritize funding your children’s education while still maximizing your wealth and creating a tax-efficient financial plan.
Worried About Taxes?
If you’re worried about taxes this season, speaking with a financial planner to help you develop a strategy that addresses your concerns might be in your best interest. Contact Kelly Financial Planning today for help mitigating the impact of taxes on your income as part of a comprehensive financial plan.