Good Financial Reads: Your Tax Planning Guide (Part Three)

In our first video on pre-retirement Roth Conversions , we talked about what Roth Conversions are and why you might want to do them. Saving taxes is a big driver of the strategy. You strategically “fill up” lower tax brackets in order to avoid seeing Required Minimum Distributions drive you into higher tax brackets while in retirement. In Part 2 of our series on Roth Conversions, we’re taking a deeper look on how to plan for this strategy years before your retirement.

For those of us with financial legacy goals, it’s easy to focus on accruing wealth surplus (i.e. the amount of accumulated wealth over and above that needed for retirement spending needs) through increasing our income or going with a more aggressive asset allocation that provides a higher rate of return over time. When your financial plans include strong legacy goals, these may be perfectly reasonable avenues for building wealth surplus, but just as important is building and preserving wealth surplus through strategic tax planning. One of the best ways to do this is through an account we often don’t associate with long-term savings – Health Savings Accounts (HSAs).

Let’s look at how tax free accounts work. Who are they for and what rules do they have? Maybe this is an account that’s beneficial for you. We have already discussed taxable accounts and tax deferred accounts in our recent posts. When thinking of tax free accounts think of after-tax account types. For example Roth, Roth IRAs or Roth 401(k)s; these are after-tax accounts. 

As you near retirement, you can stretch your retirement dollars by saving taxes through strategic Roth Conversions. The goal is to help you save on taxes that you normally have to pay when you take money out of a Traditional IRA. We do this by being strategic about when you are recognizing retirement income, moving some Traditional money to a Roth in years when your income is low and you’re in a low tax bracket. This way, we’re able to “fill up” lower tax brackets that might otherwise go to waste.

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Tax Filing Deadline & Stimulus Payments- Be Careful!

by Michelle Smalenberger, Financial Design Studio, Inc.

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