What is a HSA?

Health Savings Accounts (HSAs) are the undeniable top choice for paying for current medical expenses or saving for future healthcare costs. But they don’t stop there…

HSAs are the most tax-advantaged savings account available.

Medical expenses are one of the facts of life. Regardless of your age, current health, lifestyle or tax bracket, you will inevitably at some point incur healthcare costs. Knowing that you’ll be spending on these expenses eventually, it makes sense to save the most possible tax on those expenses by putting savings into an account designed specifically for healthcare expenses.

Not beginning contributions to your HSA as soon as possible means time and money lost from the tax deduction and tax-free lifetime earnings. Did you know that you can only contribute to your HSA until age 65, before your Medicare benefits begin?

The Increasing Cost of Healthcare

A 65 year old couple retiring this year should expect to spend $300,000 on healthcare during their lifetime. Retirees typically have a fixed income, so it makes sense to fund your Longevity bucket well and take advantage of tax savings opportunities where possible. HSAs are a solution.

HSAs must be paired with a qualified consumer-driven health plan (CDHP), which typically has higher deductibles than other health insurance plans. (Higher deductibles are offset by the lower monthly premiums that CDHPs often have.)

The Best Way to Save for Retirement

Always take advantage of any matching your employer offers on your HSA and 401(k) contributions- it’s free money.

If you can max out your HSA contributions with payroll withholding, do so. HSA contribution limits for 2024 are $4,150 for individuals with self-only insurance coverage and $8,300 for individuals with family insurance coverage. Additionally, once you are over age 55 you can contribute an extra $1,000 to your HSA annually as long as you are already eligible to make HSA contributions.

It’s important to note that you may only contribute to your HSA until you reach age 65 and before your Medicare benefits begin. Not participating in a HSA while you are eligible is time and money lost from the tax deduction and the tax-free lifetime earnings to which it is privileged.

HSA & Taxes

HSA contributions are a tax deduction at the federal level (though they are taxed at the state level in California). Those FICA tax savings are like an extra 7.65% for you (and your employer, if they are matching you!). One of the biggest perks of an HSA is its triple tax benefit– contributions are tax free, withdrawals are tax-free, and interest grows tax-free — making it the most tax-advantaged savings account on the market.

Withdrawals from your HSA are tax-free when used for a qualified medical expense. Any withdrawals for non-qualified expenses face applicable income taxes and an additional 20% penalty. But, that 20% penalty goes away after you turn 65, so non-medical withdrawals after 65 are treated exactly the same as withdrawals from a traditional 401(k) or IRA.

Health Savings Accounts are a great way to save for your retirement longevity needs. Our next best bit of guidance on the topic though: Do everything you can to stay in good health now. Invest in yourself for now and the future by taking part in the best healthy lifestyle that works for you.

Life By Design Investment Advisory Services is a HealthSavings Advisor. LBDIAS can help you identify the best retirement solutions for your specific needs and put them into action. Contact the team today to set up your next appointment and proactively prepare for your retirement.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

Strategic Tax Planning – 2024

THE NEED FOR AN OVERALL PLAN

Although identifying tax opportunities on an annual basis is a good first step for tax preparedness, strategic tax planning decisions should be made in the context of an overall financial plan (including reasonable year-by-year tax projections). An overall plan will help guide decisions that may actually include choosing to pay some additional tax in the present in order to avoid considerably more in the future.

For example, if you are likely to have funds left over at the end of your lifetime and your children are high income earners, leaving life insurance or Roth IRA assets would likely be more beneficial than leaving traditional IRA assets. If your beneficiaries are charitable organizations, then leaving IRA assets would be preferable as neither you nor the qualified charity would pay federal income tax on these assets.

Another example is Required Minimum Distributions (RMDs) from IRA accounts. RMDs must begin at age 72 years. If you have significant savings in IRA or other pre-tax retirement accounts, estimating your eventual RMD may help you identify the potential for especially large tax bills in the future that may be reduced by taking some action today.

If you are likely to spend the majority of your savings during your lifetime, tax-efficiency should be viewed as secondary to ensuring you are able to meet your needs in a variety of personal circumstances, such as an early death of a family member, high health care expenses, or a poor investment market early in your retirement. While tax planning may play a role in improving your ability to deal with these situations, it likely will not be the primary means for doing so.


These are only a few of the considerations addressed by a comprehensive plan. Contact us at Life By Design Investment Advisory Services today to determine whether you could benefit from an overall financial plan.

 

A PROGRESSIVE TAX SYSTEM

The United States federal tax system is progressive, meaning that people who have higher incomes pay a higher tax rate on each additional dollar earned. Most income can be grouped into two broad categories: ordinary income and capital gains. Each category receives its own income tax treatment.

For retirees, ordinary income most commonly includes earned income, taxable interest, rents, short-term capital gains, pension payments, and withdrawals from IRA accounts. The taxable portion of Social Security benefits is also treated as ordinary income.

Long-term capital gains and qualified dividends receive favorable tax treatment compared to ordinary income, with brackets considerably lower than those for ordinary income. These brackets, however, are tied to the amount of ordinary income a taxpayer has. So if a taxpayer had enough ordinary income to fully reach the 22% ordinary tax bracket, the first dollar of long- term capital gain would be taxed at 15%.

YOUR 2024 TAX STRATEGY

We work to provide a landscape view of your tax situation, which may allow us to suggest alternate patterns of withdrawal or contribution to retirement accounts like 401ks, IRAs or Roth IRAs. We can also help you understand when it may be beneficial to consider Roth conversions or harvest a capital gain or capital loss in your taxable accounts. Although we do not provide tax advice, this strategic tax consulting can help you and your tax advisor proactively identify opportunities to save on taxes throughout retirement.

Contact us today by phone or email [email protected] reserve your appointment to discuss strategies to improve your 2024 tax situation. For example with “tax bracket arbitrage”, allowing some IRA income to be exposed now up to the next tax bracket threshold along with a Roth conversion.

For more on the opportunities available through the use of a Roth click the button below.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

4 Steps to Take When You Inherit an IRA

As the population in the U.S. grows older, it is becoming increasingly common for individuals to inherit retirement accounts from their family members or dear ones. However, it’s important that as an heir to such accounts you follow particular steps in order to avoid making mistakes that could cost you.

There are several options to handling inherited accounts, which depend on a variety of factors including your relationship to the original account holder, the age of the original account holder when they passed away and the type of account you’ve inherited. Here are four crucial steps to follow to increase your benefits in the long run:

STEP 1: TITLE THE NEW IRA

Once you inherit an IRA, you’ll want to make sure it’s set up correctly. An inherited IRA should have the name of the deceased original owner and it should also indicate that the IRA was inherited. Alternatively, if the deceased was a spouse you have the option to roll over the amount of the inherited IRA into your account. Keep in mind that if you transfer any distributed money to a new account in your name, you must do so within 60 days.1

If you’ve inherited an IRA from someone other than a spouse, you will not be able to simply move money into your own retirement account. In order to keep the tax benefits of the inherited account, you will need to set up a new Inherited IRA for Benefit under your name.2 After the account has been created, you’ll be able to transfer assets from the original account to your beneficiary IRA.

STEP 2: CALCULATING THE RIGHT DISTRIBUTION AMOUNT

If you’re the spouse of the deceased, the prior year-end account value and life expectancy are needed to calculate the distribution amount on your inherited IRA. For this calculation, the value of the account from the last year is used. For example, in order to calculate distributions for the year 2024, the account value on December 31, 2023, is used.

If you are a non-spousal beneficiary, it’s important to note that you’ll be required to withdraw the entirety of the account within 10 years, if the deceased passed on or after January 1, 2020.3 (Prior to the SECURE Act passing, the IRA amount was allowed to be withdrawn throughout the beneficiary’s remaining life expectancy.)

STEP 3: DETERMINE IF THE IRA HAS AN AFTER-TAX BASIS

Many beneficiaries are unaware if the IRA they’ve inherited has an after-tax basis or not. If you have inherited an IRA and you find out that it has an after-tax contribution you should fill out a Form 8606.4 By completing this form you’ll be able to claim the non-deductible portion of the required minimum distribution.

You can always ask the executor if they are aware that the IRA has an after-tax contribution, but they might not know themselves and will need to refer to the tax returns of the deceased to learn if they filled out the form previously.

STEP 4: MAKE A PLAN FOR THE TAXATION OF DISTRIBUTIONS

Taxation of distribution is different for Roth IRAs and other IRAs. In many cases, Roth IRAs have distributions that are tax-free if the beneficiary is taking the minimum distributions. However, for other IRAs, the distributions are fully taxable unless the original IRA owner had a tax basis on their IRA. If the distribution is taxable, you can add the taxable portion of the distribution to the tax projection for the year to learn the amount of tax you should withhold.

As you make a plan for distribution, remember the SECURE Act’s change for non-spousal beneficiaries. You will be required to distribute the entirety of the account within 10 years of inheriting it. Exceptions to this rule include:

  • Disabled or chronically ill persons
  • Minors
  • Those who are less than 10 years younger than the deceased3

To avoid making costly errors, you should meet with your retirement wealth advisor as soon as you learn that you have inherited an IRA. Mistakes could mean larger taxes and complexities in the long run.

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
  2. https://www.forbes.com/sites/davidrae/2019/09/19/inheriting-an-ira/#6993dff82b7f
  3. https://www.congress.gov/bill/116th-congress/house-bill/1994/text?q=%7B%22search%22%3A%5B%22h.r.+1994%22%5D%7D&r=1&s=2#toc-H084B5EBD76DF47C0B895121999E2270E
  4. https://www.investopedia.com/articles/retirement/04/030304.asp
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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

Are You Rothing?

HOW TO AVOID THAT FUTURE TAX BOMB IN RETIREMENT

As we plan and prepare for living a Retirement Life By Design, ask yourself this question- what would need to be your perfect mix of future income sources? Your IRA, 401k, SEP and 403b make up your future income and could be a tax bomb, and the IRS is very much looking forward to your share and contractual contribution to taxes. Somewhere along our journey of accumulation we were lead to believe we would be in a lower tax rate at the age of 70, well this is just not always the case- especially for higher-income earners later on. Todays tax complexities have really been a main focus for our firm. Higher retiree income earners are challenged with an increased loss of benefits and even surcharges on Medicare Part B, which means a reduction in your Social Security payment. This is all calculated each year at tax time. So what is the Tax Bomb? It’s the future tax liability from your deferred IRAs at the time of distribution and mandatory distributions now at age 73 (if you were born after 1/1/1960, the RMD age is 75). To understand more specifics on 2024 taxable income and the IRMAA Medicare surcharges view 2024 Important Numbers.

Paying taxes voluntarily is a strange thing for most people to consider. But it may help to think of it like this – why pay tax on the harvest instead of on the seed? Most people will face a retirement that will require them to pay income tax on all their earnings for the rest of their lives. However, those retirees with Roth IRAs will have the benefit of taking distributions for the rest of their days with no taxes, and in most instances, even for their heirs.

Non-spousal beneficiaries (there are exceptions) are required to recognize 100% of all the IRA inheritance within 10 years. This brings a tremendous amount to tax revenue from Traditional IRAs to the IRS with this Baby-Boom generation, the majority of whom have built their retirement wealth on hard earned savings in these retirement plans vs. the previous generations that lived on pension funds. Additionally one of the biggest benefits to a Roth owner is there is no RMD (required minimum distribution) on your IRA.

As you plan and prepare for retirement or even in retirement today, there is a Roth for you. Let me share a little history on Roths. They really began to take interest in 1997 and since then there have been six legislative changes to some of the features and benefits. Early on the Roths were not explored by higher income earners due to the income limits to contribute with after tax dollars. If you did participate, the maximum contribution over the age 50 in 1997 was $2,500. Fast forward to 2024… what if I could tell you that you could potentially contribute up to $69,000 a year into your qualified retirement plan as a high income earner?

SO ARE YOU READY? LET’S START ROTHING.

There are many options in Roth contributions and conversions, that depend on several factors. Below are the 5 biggest ideas we have for exploring what might be a starting point to then deepen the scenario that’s right for you and your future retirement income and tax awareness. This article is meant to share highlights and bring familiarity of Rothing options. We advise you meet with your Wealth Advisor at LBDIAS or your CPA to further understand the tax strategies and know the hold requirements to satisfy the full tax free distributions in the future.

1. TRADITIONAL ROTH

Funding with after tax dollars that grow tax free on contributions and earnings. All future withdrawals if held for the required 5 years and combined with reaching age 59.5 will not be taxed. Current contribution limit in 2024 is $7,000, over age 50 catch-up $1,000 for total of $8,000. Non-working spouse contributions are also eligible based on MFJ. Caution, this type of Roth with after tax dollars is subject to MAGI phaseout limit of $230,000 – $240,000 for a (MFJ) married filing joint. (See tax facts for 2024)

2. 401K ROTH

This is a growing option in employer plans. Contributions regardless of income is $30,500 ($23,000 max contribution + over 50 $7,500 catch up). Check also to see if the employer offers matching contributions on your Roth. My recommendation is to consider this a serious option if you have built up a substantial pre-tax IRA. Next, look to making after tax non-qualified contributions up to higher thresholds, then convert with no taxable event on contribution to a Roth IRA, also known as a Back Door Roth.

3. CONVERSIONS

Traditional IRA or any of the previously mentioned qualified IRA accounts can be converted without any income limitations. The converted amount is taxable at time of conversion. This is the biggest impact area for reducing the future tax-bomb. If you have an opportunity to convert in a reasonable tax scenario or have a substantial loss or reduction in other income in a particular year, you could possibly pay taxes at this time less than what would be expected in the future. Many retirees discover in retirement up to 85% of their Social Security Income is taxable and combined with other investment income such as capital gains from other assets or even a sale from a property. These all combined together create a collision of new tax issues. Plus IRMAA surcharges that were never imagined. If you hold a large pre-tax IRA, consider ways to convert strategically. If you’re retired today and have not yet initiated your distributions, consider building the Roth conversion now to reduce future RMDs and reduce the tax liability to any non-spouse heirs.

4. MEGA BACK DOOR ROTH

After-tax non-deductible contributions are made in the 401k- typically funded after maximizing the $30,500 to your IRA, or Roth IRA- then you’re possibly allowed a total contribution of $69,000 using the figures in 2024 Important Numbers. Once the contribution is funded you can convert the non-qualifed account over to a Roth IRA. Only earnings accumulated during the time in the traditional IRA 401(k) account would trigger a taxable amount. The end result is that you have just converted to tax-free growth for all your future years without present income restrictions. Doing this as a pre-retiree is an amazing opportunity to make an impact against that tax-bomb later.

5. RENTAL PROPERTY CONVERTED TO VACATION HOME ROTH

Investment real estate owned and purchased by your Roth that can be used for your future vacation home. Convert your pre-tax (traditional) IRA to a Roth. You will be taxed on the converted amount on your tax return for that year. Another strategy is to stretch out the taxable event converting over a period of years, or build up your contributory Roth account and purchase the real estate in your Roth IRA. All net receipts of the rental are simply deposited into your Roth IRA account at your custodian. Once you achieve the age of 59 1/2, and it has been at least 5 years since you converted all to a Roth IRA, you are able to take a full distribution of your Roth IRA without penalties or taxes. In your case, you can take a distribution of the property – moving it from the Roth IRA to your individual name, completely free. Better yet, all the rental earnings for the past five years can stay in the Roth account and be re-invested, or withdrawn, all based on your choice including leaving the property there for infinite years and to your heirs tax-free.

TAKE THE NEXT STEPS.

Call in and work with Life By Design Investment Advisory Services to learn more about our wealth strategies encompassing your future and retirement concerns. Speak with Wealth Advisor Monique Marshall, RMA®, AIF®, who specializes in retirement wealth management strategies. Contact us today.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

Shopping with a Purpose

What if your holiday shopping could amount to more than just a heftier than usual credit card bill in January?

If you had the chance to gain something more than checking names off your list, would you take it? This year, Christmas shop with a purpose. The purpose being your children and your grandchildren… shopping to earn cash back rewards towards their college savings.

Shopping with UPromise, you have that opportunity. If you’re not familiar with UPromise, take a look at their website to learn more and get informed. You can earn up to 5% back your online shopping once you become a member. Ask other family members to join in for the children this Christmas and in future to support a gift that truly keeps giving.

Take it to the next level and tie in 529 plans.

A 529 is a tax-advantaged savings plan. 529 Plans were designed to encourage saving for college, but the benefit doesn’t stop there.

The benefits of a 529 Plan.

  • With a 529 savings account, earnings are not subject to federal or state tax when used for qualified higher education expenses, include, but are not limited to;
    • Tuition and mandatory fees.
    • Computers, books, supplies.
    • Room and board when enrolled at least half-time.
    • Some qualified loan repayment.
  • Many states offer tax credits or deductions on contributions.
    • California Residents: While contributions are not deductible for California income tax purposes, earnings accrue free of state income tax.
  • There are no age restrictions. Meaning you can fund your grandchild’s education or your own continued studies in retirement.
  • Funds can be used for tuition K-12, college, university, or any eligible higher education institution.

You can link your UPromise credits to your State 529 plan of choice. Let your contributions then grow tax free. Considering continuing your education yourself in your retirement? 529 plans can also benefit you in this situation.

Contact the team at LBDIAS to discuss opening a my529® account and how it may work within your financial plan strategy.  Contact us by phone 714-541-4180, email [email protected] or at your next scheduled financial plan meeting.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

How We Assist You in Tax Planning & Lowering Your Liability

With income comes taxes, and investment incomes are no different. As your portfolio grows into retirement, it’s important to consider your pre-tax and post-tax retirement incomes, and how future tax liabilities may impact your overall retirement strategy.  If you’re working with Life By Design Investment Advisory Services, we will consider these factors when building your plan.

Ideally, you should look into getting professional help with tax planning long before you retire. The U.S. tax code is thousands of pages of legislation, court rulings, and legal interpretations. And if you’re a high net-worth individual, you’re more likely to pay higher taxes. LBDIAS can help minimize taxes owed- so don’t leave tax planning to the last minute!

Dividends

One of the most common ways to reduce taxes is dividends. Since corporate dividends are paid from after-tax business income, governments typically tax them at a much lower rate than salary or hourly wages. If you are self-employed, you will likely have a few options to move money from your business to your personal accounts. 

This can be complex, and depend on where you live and work. We have up-to-date information, along with a knowledge of laws and conventions that are relevant to you. Your wealth advisor will determine what applies to you, and can help structure your affairs to earn dividends instead of a salary. 

Charitable Giving

Charitable donations are another common vehicle we use to reduce taxes. Giving to nonprofits is an honorable thing to do, and it also reduces your tax burden. Tax-conscious investors will often donate their securities directly to an organization; a strategy that may offer many benefits. If you have a charity or NGO close to your heart, consider contacting their “planned giving” or legacy advancement offices.

Estate Planning

Estate planning is likely the most important aspect of tax planning at a professional level. Depending on where you live, the “death taxes” you may owe after passing could be quite high, but there are many strategies to minimize taxes at the estate level. Family trusts, foundations, and other corporate structures are strategies we often use to lower estate taxes, sometimes significantly.

Time is Money Saved

Lastly, the best value from working with a wealth advisor is free time. Most of us investors just want to save and get our money working for us. Let the professionals do the heavy lifting when it comes to research, strategy, and education. Life is short – do you really want to spend your free time reading charts and tax tables?

Investing takes a day to learn and a lifetime to master. Trusting yourself to research all the options and make the right choices for your future can be overwhelming – even if you have a degree in finance. We are researching and strategizing around the constant changes taking place in the market, taxes, and estate planning. The world of investing only gets more complicated, so it’s crucial to stay up-to-date. It pays to rely on an expert instead of doing it all on your own.

There are countless ways to reduce your tax payments. 401(k) plans are just the start. Your life is bound to change over the course of your working life, and Life By Design Investment Advisory Services can help tailor your plan as needed. 

Whether you have millions or very little, there is a real benefit to professional advice for tax planning. An experienced wealth advisor can help you grow your savings and retain more of their value at tax time. Taxes can make an enormous difference in your post-retirement income, so it pays to get advice that may help you achieve more in retirement.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

5 Tax Planning Opportunities to Invest In Now

While following a solid tax planning strategy throughout the year is integral to your overall financial plan, some special considerations may maximize your refund or reduce overall tax liability.

Let’s look at some of the tax-saving strategies you could be taking advantage of.

Maximize Retirement Contributions to Traditional IRAs

If you aren’t taking advantage of your annual retirement contribution limits, you might miss out on reducing your taxable income. Traditional IRA contributions are made with pre-tax dollars and aren’t taxed until withdrawal, so maximizing contributions could keep you from running over into a higher income tax bracket. Contributions to 401(k)s and 403(b)s must be made by December 31st to impact your 2023 taxes, but the deadline for making traditional IRA contributions is April 15, 2024.

Contribute to Charity

Donating to your favorite charitable organization is another way to reduce your taxable income, and there are several ways to give.

  • Donate cash or goods to a qualifying charity. Remember to collect and file all receipts, especially if you donate over $250. The IRS requires written acknowledgment for donations of $250 or more.
  • Contribute to a Donor-Advised Fund (DAF). This strategy allows you to allocate a lump sum of funds to distribute to various charities over multiple years. This can work well if you earned a higher-than-average income and are looking to offset the increased income right away.
  • Donate your Required Minimum Distribution (RMD). Owners over age 70 ½ can transfer up to $105,000 tax-free directly from their IRA to a qualified charity. Keep in mind that charitable contributions can only be made from IRAs, so you may need to first perform a rollover if you’re looking to use funds from a non-qualifying account.
  • If you’re over 70 ½, click here.

Defer Income

If you own a business, deferring income is considered an essential factor in your year-end tax planning. Consider the items or expenses you may be able to pay out after the new year, such as employee bonuses or even income paid to yourself. If you expect to earn less in 2024, pushing these expenses out may be particularly helpful.

Take Deductions Early

Another aspect of business planning strategy is accelerating expenses to use as deductions in the current year. For example, if you’re planning to hire outsourced vendors in January, you could request to pay for their services in advance to deduct them from your current year’s income. Other deductions examples include interest payments or medical deductions.

Tax Loss Harvesting

This strategy involves intentionally selling investments at a loss to offset either: 

  • Capital gains that resulted from selling securities
  • Up to $3,000 in non-investment income

However, there is a limitation to this practice. In order to prevent taxpayers from taking advantage of this perk, the IRS implements the “wash-sale” rule, which nullifies a loss claim if the same or nearly identical security is re-purchased within 30 days of the sale.

Like all planning, preparation is essential—especially when time-sensitive moves and deadlines are involved. If you need help with your end-of-year tax planning, consider talking to a financial or tax professional.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

Making the Most of Your Tax Return

Tax season is ending, and many of us are looking forward to our tax returns hitting our bank accounts. While some may choose to spend their return on a special treat, others may want to use the extra funds to boost their investments. If you’re trying to decide where to spend (or save) it, here are some ideas for how to make the most of your tax return. 

Pay Down Your Debt 

Paying down your debts is one of the best ways to use extra funds when you have them. Debt can put a damper on your financial health by affecting your credit score—as well as your ability to save and invest—so keeping debt to a minimum is a smart financial decision. 

Pay your highest-interest debt, like a credit card or auto loan, first. In general, it’s a good practice to keep your debt lower than 30% of your total available credit—if you’re carrying balances higher than this, you should consider paying them down or even refinancing to make them easier to manage. Using your tax return to pay off a portion of your debt can give you a good head start when it comes to managing your finances.

Build Up an Emergency Fund 

Once your debt is taken care of, the next step to financial health is to make sure you have an adequate emergency fund. In general, it’s a good idea to have easily accessible money set aside for unexpected expenses like medical emergencies, home repairs or a sudden job loss. If you have an emergency fund already, take note of how many months of expenses it would cover— try to aim for three to six months’ worth. 

For those who don’t have an emergency fund, this is a great time to start. Set a goal for how much you want to save, and start with your tax refund. Even if you begin with a small amount in savings, you can continue to contribute to your emergency fund as you’re able, until you’re comfortable with the amount you may need. 

Treat Yourself 

If your debt is under control, you may choose to spend your tax return instead. It may be a great time to consider purchasing something you normally wouldn’t spend money on—whether it’s a wardrobe update or a house renovation. Especially after such a long and stressful year, we all deserve a little something for ourselves. Depending on the amount of your return, it may be possible for you to use it to treat yourself to something small and save or invest the rest.  

Boost Your Investments 

Another way to make the most of your tax return is to invest your money. If you have existing investments, you may want to give them a boost by adding capital to your accounts. This may mean making an extra contribution to your IRA or buying a few more shares of stocks. 

If you’ve never invested before, using your tax return can provide a way to get started without taking any additional funds out of your regular monthly budget. If you’re considering saving your tax return over spending it, it can be beneficial to invest the funds because they have the potential to grow over time. If you’re unsure where to start, talk to a financial professional to figure out the best types of investments for your specific needs. 

Giving

Ultimately, giving is the greatest strategy of all if you’ve satisfied the areas above. You can start putting money aside to fund your 529 college savings plans for loved ones. Or you can support local organizations that mean the most to you. There’s no doubt that it feels great to help someone in need through charitable giving and there can also be tax benefits that come along with donations. If you’re looking to establish a charitable giving plan, start here with What Issues Should I Consider When Establishing My Charitable Giving Strategy?  

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Our financial planning process includes investment recommendations and provides tax guidance, but it is not meant to represent formal tax advice. Life By Design Investment Advisory Services (“LBDIAS”) is a Registered Investment Advisor offering advisory services in the State of California and in other jurisdictions where exempted.

 

Maximizing Your Impact: Year-End Tax Strategies Through Charitable Giving and QCDs

As the year draws to a close, it’s not only a time for festive celebrations but also an opportunity to take a closer look at your financial situation and explore strategic moves to optimize your tax position. One avenue worth considering is charitable giving, coupled with Qualified Charitable Distributions (QCDs), a combination that can not only make a positive impact on the causes you care about but also provide potential tax benefits. In this blog post, we’ll delve into year-end tax strategies, the power of charitable giving, and the advantages of utilizing QCDs.

Charitable Giving: A Heartfelt Approach to Tax Planning

Charitable giving is a powerful way to contribute to the well-being of society while also offering potential tax advantages. By donating to qualified charities, you may be eligible for deductions that can reduce your taxable income. However, to maximize these benefits, it’s essential to be strategic in your approach.

  1. Review Your Finances: Before making any charitable contributions, take stock of your financial situation. Consider factors such as your income, potential tax liabilities, and overall financial goals. This assessment will help you determine the optimal amount to donate.
  2. Donate Appreciated Assets: If you have investments that have appreciated over time, donating them directly to a charity can be advantageous. By doing so, you not only support a cause but may also avoid capital gains taxes that would apply if you sold the assets.
  3. Bunch Your Donations: The standard deduction has increased in recent years, making it more challenging for some taxpayers to itemize deductions. Bunching your charitable contributions—making larger donations in specific years—can help you exceed the standard deduction threshold, making itemization more beneficial in those years.

Qualified Charitable Distributions (QCDs): A Tax-Efficient Giving Strategy

For individuals aged 70½ or older, QCDs offer a unique opportunity to support charities while potentially minimizing taxable income.

  1. Understand QCDs: A Qualified Charitable Distribution allows you to directly transfer funds from your Individual Retirement Account (IRA) to a qualified charity. This distribution counts towards your Required Minimum Distribution (RMD) without being included in your taxable income.
  2. Take Advantage of Tax Efficiency: Since QCDs aren’t considered taxable income, they can be a tax-efficient way to meet your charitable goals. By reducing your taxable income, you may also lower your adjusted gross income (AGI), potentially impacting other aspects of your tax liability.
  3. Be Mindful of Limits: While QCDs offer tax benefits, there are limits to the amount you can distribute annually. Currently, the maximum annual QCD is $105,000 per taxpayer (up from $100,000 in 2023). Be sure to stay within these limits to fully leverage the tax advantages.

  • As the year concludes, incorporating charitable giving and QCDs into your financial planning can be a rewarding and tax-smart strategy. By aligning your philanthropic goals with effective tax planning, you not only make a positive impact on the causes you support but also optimize your financial position. As always, it’s advisable to consult with a tax professional to tailor these strategies to your specific circumstances and ensure compliance with current tax laws.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

Strategic Finale: 10 Tips For Optimizing Your Year-End Tax Position in 2024

As the year draws to a close, it’s the perfect time to assess your financial situation and implement smart strategies to minimize your tax liability. Proactive planning can make a significant difference in your year-end financial picture. Let’s explore some effective year-end tax strategies for 2024.

1. Review Your Investment Portfolio

Take a close look at your investment portfolio. Consider selling underperforming investments to offset capital gains or using capital losses to reduce your taxable income. Additionally, strategically rebalancing your portfolio can help align your investments with your long-term financial goals.

2. Maximize Retirement Contributions

Boost your retirement savings by contributing the maximum allowable amount to your 401(k) or IRA. These contributions not only secure your financial future but can also lower your taxable income for the current year.

3. Harvest Tax Losses

Capitalize on investment losses by harvesting them strategically. Selling investments at a loss can offset capital gains and, if your losses exceed your gains, can be used to reduce your ordinary income.

4. Charitable Contributions

‘Tis the season of giving. Make charitable contributions before the year-end to lower your taxable income. Additionally, consider donating appreciated securities to maximize your impact while potentially avoiding capital gains taxes.

5. Utilize Tax Credits

Take advantage of available tax credits, such as those for energy-efficient home improvements or educational expenses. These credits directly reduce your tax liability and can result in significant savings.

6. Health Savings Account (HSA) Contributions

If you have a high-deductible health plan, contribute to your HSA. HSA contributions are tax-deductible, and the funds can be used tax-free for qualified medical expenses. It’s a triple tax advantage!

7. Plan for Required Minimum Distributions (RMDs)

If you are 72 or older, ensure that you take the required minimum distributions from your retirement accounts. Failing to do so can result in substantial penalties. Strategically plan these distributions to minimize the tax impact.

8. Consider Tax-Efficient Investments

When making new investments, consider tax-efficient options. For example, invest in tax-efficient mutual funds or index funds that generate fewer taxable distributions, reducing your tax burden.

9. Small Business Deductions

If you’re a small business owner, take advantage of available deductions. Consider making necessary purchases or investments in your business before the year-end to reduce your taxable income.

10. Stay Informed about Tax Law Changes

Tax laws are subject to change. Stay informed about any updates or new legislation that may impact your tax situation. Consulting with a tax professional can help you navigate any changes effectively.

By implementing these year-end tax strategies for 2024, you can take control of your financial future and potentially reduce your tax burden. Remember, it’s crucial to consult with a tax professional to ensure that these strategies align with your specific financial situation. With thoughtful planning, you can welcome the new year with confidence and financial peace of mind.

Click to Download/Print Article

Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.