Tax Planning
Wise people know you don’t build wealth with the amount of money you earn. Instead, you build wealth with the amount of money you save and invest. What you may not realize is that taxes can take a sizable chunk out of your earnings now and later. That’s why it’s so important to use tax reduction strategies to keep more of your wealth for yourself and your loved ones.
How Taxes Reduce Your Wealth
When you pay income taxes on your earnings before you invest the money in yourself, you have less money to put in a retirement or investment account. This means you will build wealth slower than someone who invests pre-tax dollars. Most people also fall into a higher tax bracket while they’re working, which increases their tax burden.
Investment strategies should always consider the tax implications. It’s not just about choosing traditional versus Roth retirement accounts. Certain assets may also pay dividends, and it’s important to understand when you have to pay taxes on those earnings. Our financial advisors always consider the tax implications of your investment decisions to help you keep more money for yourself.
What Are Common Tax Reduction Strategies?
Most people understand how traditional retirement accounts can reduce their tax burden while they’re contributing to their nest egg. But did you know that a Roth retirement account can also provide tax benefits? The timing differs. With a Roth 401(k) or Roth IRA, you invest money you’ve already been taxed on. But you won’t pay taxes on that income when you retire. Since income taxes are likely to increase in the future, having some of your retirement account in Roth form may be beneficial for you.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Frequently Asked Questions
Why Should I Worry about Tax Planning?
Most people don’t think about taxes more than once a year. If you’re serious about building wealth, you’ll work with a financial advisor to mitigate your tax burden and help improve your wealth-building strategies. Considering personal income tax is easily a double-digit percentage of your income, it doesn’t make sense to ignore taxes when building wealth.
Would I Ever Choose to Pay Taxes Now instead of Later?
Maybe. If you expect to earn a high income during retirement and you already have plenty of tax deductions with dependent credits right now, you may elect to pay taxes now instead of later. Income taxes will probably increase in the future, and paying at the lower tax rate now can be a prudent choice. You can even choose a combination of traditional and Roth retirement investing to take advantage of tax savings now and later.
When Is the Best Time to Plan My Tax Strategy?
With income taxes, you can’t plan retroactively. If you want to reduce your tax burden for the current year, it’s time to act now, long before the deadline to file. Since tax planning involves making strategic decisions about your investments throughout the year, we suggest you get started right now.
Let Us Help You Minimize Your Tax Burden
We understand the importance of maximizing your earnings by looking at all the factors involved. Taxes reduce your wealth-building capacity with every paycheck unless you plan ahead. Call us to make an appointment and create tax planning strategies that keep more money in your pocket.
For more information about our firm and the services we offer, send us a quick email or call the office. We would welcome the opportunity to speak with you.
info@ackermanfg.com | (727) 953-3900