As a result of our growing national debt, concerns regarding future tax rates have continued to increase in the years after the Great Recession. Once the epidemic hit, it completely changed the fiscal trajectory of the country, as it decreased both payroll and income tax receipts while simultaneously necessitating a large rise in government expenditure and debt-financed stimulus (meaning we had to borrow from future Americans to help current Americans survive an extremely difficult time). However, even though things are currently stable, there is always a potential for future changes. As such, financial advisors and other professionals in the know have been advising Americans to aim toward a tax-free retirement whenever possible. And aside from simply being a smart move from a financial perspective, the increasing debt also means a good chance that the tax rate will be going up in the future. Therefore, it’s no surprise that some professionals have been encouraging their clients to draw down on their IRAs and 401(k)s. At the same time, they’re still allowed to have a fear of paying more to the government in the future. The Tax-Free Toolbox 1. Contributions to Roth IRAs and Roth TSPs should be maximized: • By putting after-tax monies into a Roth TSP or Roth IRA, you will owe tax that year. Still, you will be able to create profits on your after-tax investment that will never result in a tax obligation (so long as some basic Roth timeline rules are followed). • If you’re eligible to contribute to a Roth IRA, you can fund both the Roth TSP and the Roth IRA at the same time (based on household earned income) • For participants over the age of 50, both the Roth TSP and the Roth IRA allow them to make extra catch-up contributions. • In this method, we choose to pay taxes on the seeds now at a known (historically low) rate rather than pay taxes on the crop at an uncertain rate in the future. 2. Roth Conversions and Tax Bracket Harvesting: • This refers to the process of converting a part of your tax-deferred assets into Roth IRAs (or CVLI) to explode the tax-deferred timebomb while “taxes are on sale.” • To do this successfully, we must coordinate your conversions’ size and speed to convert the required amount as rapidly as feasible while without significantly raising your marginal tax bracket in any one year. • Roth IRAs, which were introduced in 1998, had an earned income restriction on Roth Conversions until 2010. Now, there are no earned earnings limits for Roth Conversions, although this may not always be the case. • Using this method, you may pay off your portfolio’s tax due in smaller chunks while staying out of the highest tax rates, resulting in a lower overall tax payment than converting the portfolio all at once. 3. Health Savings Account (HSA): • Also known as a Healthcare IRA, HSAs are mainly meant for consumers who have a High-Deductible Health Plan to invest their emergency cash (HDHP). • When used to pay for a qualified medical bill, an HSA generates tax-free disbursements, and the account balance may roll over from year to year if no medical emergency occurs. • Another appealing aspect for those who are qualified is that an HSA may generate compound interest, thus increasing the value of your emergency money. • Co-pays and out-of-pocket deductibles, most vision/dental/hearing expenditures, FEHB premiums, eligible LTC Insurance premiums, and so on are all examples of qualifying expenses. • Warning: Health savings accounts (HSAs) may be beneficial, but they are complicated and need a lot of red tapes to guarantee that only individuals who have a qualified medical bill benefit from them. 4. Cash Value Life insurance (CVLI) may help you save money on taxes in three ways: • Accelerated Living Benefit Riders (ALBRs) – a kind of rider that allows an insured to receive a portion of a policy’s Death Benefit (typically tax-free) while still living if they experience a qualifying medical emergency or need help with daily tasks to age gracefully. • Death Benefit — The profits of a life insurance policy are tax-free to the beneficiaries. They may provide substantial income continuation possibilities for a spouse or a highly leveraged legacy to loved ones. • Tax-Free Distributions — permanent plans enable you to earn compound interest on your excess premiums, and the policy’s cash worth may be accessed in a variety of creative and tax-efficient methods during the insured’s lifetime (without requiring a qualifying medical event as a trigger) 5. Downsizing primary residence: • The IRS permits people to realize profits on the sale of their primary residence of up to $250,000 without paying capital gains taxes. • This implies that reducing the primary residence might result in a tax-free profit of up to $500,000 for a married couple to help with other retirement costs. • While this is only an introduction to some of the most fundamental tax planning ideas, it’s vital to remember that tax rules are incredibly complicated. Errors may be expensive, so this material should be utilized in combination with continued education and expert advice.
Contact Information:
Email: [email protected]
Phone: 9143022300
Menu
Menu
