Tax-Intelligent Opportunities for High-Net-Worth Families
Authored by: Bradi Dahmen, Financial Advisor, Director of Wealth Management
Why Tax Diversification Matters
You've probably heard of diversification when it comes to investments. This concept can apply to taxes too. It's called "tax diversification," and it's similar to building a financial safety net against potential future tax hikes. Tax laws can change, and those changes might mean higher taxes down the road. By creating a mix of tax strategies now, you can set yourself up to weather whatever may come your way.
The Tactical Roth Conversation
Roth accounts can offer tax-free growth and withdrawals, and using this strategy is a great way to hedge against those future tax uncertainties. But here’s why this is important. Within certain favorable tax brackets, you can have a tactical conversation about contributing to a Roth account. It's all about strategically picking the right time to convert some of your traditional IRA funds to Roth status, potentially locking in lower taxes now for a tax-free retirement later.
Alternative Routes to Fund Your Roth Accounts
You might be wondering, "How do I fund a Roth account?" There are some creative ways to make it happen:
- Backdoor Roth IRA Contributions: If your income is too high to directly contribute to a Roth IRA, the backdoor option might be your golden ticket. This involves making a nondeductible contribution to a traditional IRA and then converting it into a Roth IRA. It's a creative workaround that can open the door to Roth benefits.
- After-Tax Contributions: For those who max out their workplace retirement accounts, after-tax contributions can be a game-changer. You can convert these after-tax contributions to Roth accounts, and voilà—tax-free growth!
- Designated Roth Accounts in Retirement Plans: If your employer offers a Roth 401(k) or 403(b), you're in luck. Contributing to these accounts allows you to build your Roth savings within your company's retirement plan.
Get Creative with Deductions
Now, let's think about deductions. Two strategies for higher-income taxpayers include:
- Lump Sum Charitable Deductions: Have you ever considered using Donor-Advised Funds (DAFs)? They're like your personal charity piggy bank. You make lump-sum donations, get the tax break upfront, and then distribute the funds to charities over time.
- Qualified Charitable Distributions (QCDs): If you're 70½ or older, QCDs let you send your Required Minimum Distributions (RMDs) directly to charities. This not only fulfills your RMD but also keeps those funds from boosting your taxable income.
Making Taxes Your Ally
Here's the bottom line. Taxes might seem like a maze, but with the right planning conversations and integrated strategies, they can work in your favor. From Roth tactics to creative funding routes and deduction strategies, there's a whole toolkit of options at your disposal. And you don't have to navigate this alone.
Your financial advisor should provide personalized guidance, inform you about industry changes and help you make strategic financial decisions. Make sure you are working with a partner who understands the tax implications of your overall financial plan. If you are looking for a financial advisor or a second opinion, I encourage you to reach out to our team through our website at cnccpa.com or give us a call at (509) 663-1661.
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