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Beyond the IRA Thumbnail

Beyond the IRA

By Mikael Jacobs, Partner

Who loves paying taxes? Comments we regularly hear in our office go something like,

  • “I hear Trump doesn’t pay…well, I don’t actually know what he pays…but I’m guessing he doesn’t pay a high tax rate. How do I get deductions like that?”
  • “I hear Warren Buffet pays a lower tax rate than his secretary. How do I get deductions like that?”
  • “My CPA isn’t creative enough. What can I do to save on taxes?”

For most people, there is no magic bullet to substantially impact taxes. Here are some ideas to consider and discuss with a tax professional.

  • Bunching itemized deductions: The increase in the standard deduction ($24,000 for married filing jointly) has impacted the ability for many taxpayers to itemize deductions. Are your itemized deductions under or near this threshold? If so, consider bundling your itemized deductions (charitable giving, real estate taxes, etc.) in alternating years. This may allow you to itemize every other year, maximizing your deductions. A Donor-Advised Fund (discussed below) is one way to do this with charitable deductions.
  • Health savings accounts: Did you know that a Health Savings Account (HSA) is one of the most highly tax-advantaged vehicles available? If you qualify, money going into your HSA is tax deductible, grows tax-free, and withdrawals are tax-free for qualified medical expenses. A lesser-known fact about HSAs is that you can reimburse yourself for past medical expenses under certain circumstances. Have you considered paying your medical bills out-of-pocket (keeping receipts) while letting your account grow tax-free, delaying your withdrawals for those medical expenses until a later date?
  • Cash balance plan: Are you a business owner with a profitable and consistent business? Are you looking to defer taxes on more than just your allowable 401(k) contribution? A Cash Balance Plan may be worth your consideration. In some cases, business owners and highly compensated employees can contribute nearly $300,000 per year into this type of retirement plan. Eligibility and plan maintenance can be complicated, and we recommend contacting an investment or tax professional if you may be a candidate.
  • Fund a Roth IRA with after-tax 401(k) dollars: In recent years, it has become possible in some cases to roll after-tax dollars in a 401(k) plan to a Roth IRA. This could help in multiple ways. Those who are typically ineligible for Roth IRAs because of income limits may be able to fund their accounts. You could roll over more than typical contribution limits allow. You may also be able to contribute above the annual elective deferral limits to your 401(k). As an added bonus, earnings in a Roth IRA are withdrawn tax-free while earnings withdrawn on after-tax 401k contributions are subject to tax. Not all 401(k) plans allow for this strategy and the rules can be complex, but it may be worth exploring if you are looking for additional ways to fund retirement plans.
  • Enhance your charitable giving: While a tax deduction probably isn’t your motivation for giving, why not give in the most tax-efficient way? Ultimately, you may increase the amount going to charity. Two commonly used strategies are Donor-Advised Funds and Qualified Charitable Distributions (QCDs).

A Donor-Advised Fund can simplify your giving and allow you to easily gift highly appreciated assets without ever having to pay capital gains tax. Eligible assets can include publicly-traded securities, privately-held-business interests, real estate and collectibles, among others. Selling a business soon? Consider gifting a portion.

QCDs allow individuals who are over age 70.5 to gift a portion of their annual required minimum distributions from retirement plans without having to pay tax. With the increase in the standard deduction, this becomes a useful strategy for many people.

  • Move to a low-tax state: We’re biased towards Middle Tennessee, but let’s be honest, there is a tax advantage to living in our great state. We have no income tax and no death tax (sorry to be gloomy).

As with anything tax-related, there are nuances to each of these strategies.

Take a deeper look at these and other tax-saving ideas with a financial planner and contact us.

TrustCore is one of the largest independent wealth management firms in the U.S. From its offices in Brentwood, a suburb of Nashville, TrustCore advises on client assets of $1.8 billion for clients in 34 states across the nation.

Financial planning and investment advisory services offered through TrustCore Financial Services, LLC. Investments offered through TrustCore Investments, LLC, member FINRA and SIPC®. This is not an offer, or solicitation of an offer, to buy or sell any security investment or other product.