Tax laws can change, meaning the taxes you’ll pay when it's time to access your investment and retirement accounts may differ from what they would be now. While no one has a crystal ball, proper tax planning includes diversifying your tax mix to help account for potential tax law changes. This means ensuring your investments and saving accounts include a balance of pre- and after-tax structures.
Most people have a mixture of tax-advantaged accounts such as 401(k)s, 403(b)s, Roth IRAs, self-directed IRAs, and the like. Still, they may not be aware of the possibilities that will allow you to decrease capital gains, taxable income, or other factors that will affect how much you owe. Here are a few tax-advantaged financial strategies to diversify your approach to taxes.
Saving on an after-tax basis with a Roth account offers tax-free withdrawals, which is already one way to mitigate any tax changes that may arise between now and the time you plan to withdraw. But you can also utilize tactical conversions to lock in lower taxes for a tax-free retirement.
Roth Funding Alternatives
Below are three ways to convert some of your traditional IRA funds to Roth status, which may lead to tax savings.
- Retirement Plan Roth Accounts: If your employer offers a Roth 401(k) or 403(b) option, you can contribute to these accounts to build your Roth savings within the company’s retirement plan.
- Backdoor Roth IRA Contributions: Sometimes, your income may be too high to contribute to a Roth IRA. In this case, there is a solution where you can instead fund a traditional IRA and then convert it into a Roth IRA. Just make sure the contribution to the traditional IRA is nondeductible.
- After-Tax Contributions: Workplace retirement plans have limits regarding the amount you can put toward them each year, but that doesn’t include after-tax contributions. These after-tax savings can be converted to Roth accounts, allowing you to diversify your tax obligations further.
While you may be aware that charitable giving is one way to offset your taxable income, there are some creative ways to go about it that you may not be as familiar with. Here are two ways to amplify your charitable giving so that it diversifies your tax obligations.
- Qualified Charitable Distributions (QCDs): Once you reach 70 ½ or older in 2023 (and 73 starting in 2024), you will need to take Required Minimum Distributions or RMDs. If you’re worried about taking RMDs and how it will affect your taxable income, you can opt to have those distributions sent directly to charities. This satisfies your RMD and channels the funds toward a tax-advantaged outlet.
- Lump Sum Charitable Deductions: Regarding charitable deductions, there are also options called Donor-Advised Funds (DAFs). This allows you to make lump sum donations to the DAF, get the tax break, and then donate to charities over time. This can be helpful if you need to offload a certain amount of money but aren’t sure where or how you want to donate it.
Making Taxes Your Friend
We know taxes can feel overwhelming, and there are many moving parts. Luckily, there is a whole toolkit that a skilled financial advisor with tax knowledge can use to help you navigate the complexities.
At Scafa Financial Services, LLC, we help clients plan for tax obligations through their overall financial plans and strategies. With decades of experience and our backgrounds as licensed CPAs, we understand our client’s tax liabilities and creative solutions to make sure you don’t overpay. Feel free to contact our team with any questions or concerns about your tax planning strategies.