Many diligent wealth-builders fail to realize they have a permanent business partner—the IRS certainly does not. As nationally syndicated CPA Ed Slott wisely observes, “Your IRA is an IOU to the IRS.”
The primary goals of most wealth-builders are to a) maximize after-tax lifetime income and b) transfer remaining wealth to heirs as efficiently as possible. Inflation and taxes can make accomplishing these goals more challenging. Since we have limited ability to control inflation, thoughtful tax planning can play an important role in growing and retaining wealth in America.
Consider the following general tax strategies as you thoughtfully construct your own plan to help manage the impact of taxes on your hard-earned capital:
- In the early working years of life, when taxable income and tax brackets are often lower, individuals may benefit from prioritizing contributions to Roth accounts, which do not provide a current tax deduction but do offer tax-free withdrawals later in life. In the middle working years, when income and tax brackets are typically higher, a combination of Traditional accounts (which offer a tax deduction on contributions and tax-deferred growth) and Roth accounts may be appropriate. In the later working years, as income and tax brackets reach their peak and retirement approaches, some individuals may consider emphasizing Traditional contributions.
- In the early retirement years, when taxable income and tax brackets may be lower (but potentially higher in the future), some individuals consider taking distributions from Traditional accounts to “fill up” lower tax brackets. As Ed Slott also notes, “Never waste a low tax bracket with short-term thinking!” In the middle retirement years, as income and tax brackets evolve, withdrawals may be taken strategically from both non-retirement and Traditional accounts, with consideration given to projected future tax rates. In later retirement years, when taxable Social Security income and Required Minimum Distributions may be highest, accessing tax-advantaged income sources—such as Roth IRAs, HECM reverse mortgages, or cash value life insurance—can be effective tools for managing taxes in higher-bracket years, depending on individual circumstances.
Please watch for next week’s first issue of Old Forge Wealth’s new weekly campaign, Tuesday Tax Facts, which we hope will keep you well informed about new tax legislation, pertinent tax deadlines, and a range of advanced tax-planning strategies. As always, we welcome your feedback.
Think about it, and may God bless your tax management efforts, Shaun
“Tax preparation costs you money; tax planning makes you money” ~Ed Slott
“Render to Caesar the things that are Caesar’s, and to God the things that are God’s” ~Matthew 22:21
Disclosure(s)
Old Forge Wealth Management, LLC is a registered investment adviser. This material is provided for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. The views expressed are general in nature and may not be appropriate for all individuals. Tax laws and regulations are subject to change and may impact the relevance or effectiveness of the strategies discussed. There is no guarantee that any strategy will achieve its intended results. You should consult with your financial advisor, tax professional, and/or legal advisor before implementing any strategy discussed herein.