Tax-planning – 401K, ROTH IRA, and Beyond

Tax-planning – 401K, ROTH IRA, and Beyond

May 16, 2024

The old adage says, “There are two things that are certain in life – death and taxes.” Well, that is certainly true, especially in California. We pay a lot in all forms of taxes. While we can’t escape death ultimately, we can certainly try to live our best lives. That’s the same with taxes – we all pay taxes, and it can’t hurt to plan and perhaps save some money on our tax bills.

My tax education started with my first job. I had a great mentor, who saw that I was frugal and saved big chunks of my paychecks, and advised, “Try to save as much as you can into your 401K!”  I took that advice, maxing out my contributions as much as possible with each job. That was the start of my education on tax-planning – the more money I deferred into my 401K account, the less I paid in taxes. How wonderful!

After the birth of our son, I learned about education IRAs. Then there were the 529s, FSAs, HSA, ROTH IRAs, cash value life-insurances, annuities, investment tax-harvesting, ROTH conversions… you name it. I learned as much as I could, and tried to use them where I saw fit.

In fact, one of the main reasons I left my corporate job to embark on a financial planning career was so that I could also itemize and save more money on our tax bills.

I want to help you do the same and share a few tips to help you strengthen your tax-planning muscles for the long term:

  1. Review your tax returns. To better plan for the future, it’s important to find out the current state of your finances. Take a closer look at your current year and previous tax returns, and find out where you are paying most of your taxes.
  2. Reduce your taxable income. There might be possibilities to reduce your taxable income – putting more away into retirement account pre-tax contributions, Health Savings Accounts, Flexible spending accounts, deductible IRA contributions, itemizing your expenses (if they are higher than standard deduction), etc.
  3. Review your capital gain taxes. If you are doing well with your non-qualified investments, you may have more capital gain taxes to pay. Tax-harvesting, and not just at the end of the year, might help you to reduce your tax exposures.
  4. Planning ahead. Trying to do more before tax-filing day could have very limited impact, but if you plan ahead (years ahead), that could potentially make a big difference. For example, when you have a new baby, or young children, consider if you would help with their college funding. 529 or Coverdell Education Savings account could grow tax-deferred if the funds are used for qualified expenses. Flexible spending accounts and Health Savings accounts could also help save some tax dollars when used appropriately and often requires more advanced planning as well.
  5. Additional opportunities. According to eFile.com, there are nearly 10,000 sections in IRS tax codes. It is complex and sophisticated, and some codes are aimed to help motivate businesses to grow, and tax-payers to save more for their own retirement and future. Understanding more, and applying where appropriate, could help both business and tax-payers to do better financially. It’s always a good idea to learn more.

Overwhelmed? Get help from a qualified professional. Just like a GPS helps you to navigate through the roads to arrive at your physical destination, a good CPA or financial advisor might be able to help you identify more options to save on your tax-bills.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. Li Tian and LPL Financial do not provide tax or legal advice or services. Please consult your tax or legal advisor regarding your specific situation.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, and CERTIFIED FINANCIAL PLANNER™ in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.

LPL Financial and the CFP® Board are not affiliated entities.

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