Your Financial Future: Taking a look at taxes
Many people are concerned with what is going on in the economy and feel that there is nothing they can do to help their family.
Tax planning can make a big difference in the future, and you can take some action right now.
Too many people only think about taxes at the beginning of the year when they are getting their returns done for the April 15 tax deadline. Some of these people are paying more than they have to because the are not being proactive with their tax strategy.
If inflation is making it hard to buy essentials and you get a large tax refund every year, it might be a good time to fill out a W-4 and adjust your withholding. This may make more cash flow available in each pay check. Remember the government uses these excess tax payments all year and does not pay you any interest.
If you are like a lot of people, a large portion of your retirement savings might be in qualified account such as a 401(k) or IRA. This can create a tax time bomb later in life when it comes time to pay taxes, either because you need income or have required minimum distributions. At that time, it could cause your tax rate to be higher or increase your Medicare Part B premiums. It could make more of your Social Security taxable, and if you have a deceased spouse, the widow’s penalty could be very costly. To deal with these situations you may want to de-taxify some of this money.
One strategy to reduce taxes down the road might be doing a Roth conversion. If your IRA used to have a balance of $100,000, it may now be worth $80,000. Paying the tax now would be on this lower amount. If you believe the stock market will recover in the future and grow back the $20,000 or more, why not make the growth tax free? This is also important if you believe tax rates will be higher in the future. With all of the government spending to fight the pandemic, they most likely will have to go up. We know they are already scheduled to increase on Jan. 1, 2026. Why not pay taxes when they are on sale?
Today, people have more responsibility for funding their own retirement than ever before. Most do not receive a defined benefit pension unless they work for a very large company or a government entity. This means that you must save money to supplement your Social Security income.
One effective way to do this might be by contributing to a 401(k). If you receive a match, you want to be sure to contribute at least that amount. You get to reduce your current income for tax purposes by the amount of the contribution. This money will grow tax deferred until you withdraw it from your qualified account, so this savings will make retirement more enjoyable. Be careful that you do not end up with all of your money only in qualified accounts. Balance your savings between these, post-tax and special types such as Roth’s and properly structured life insurance. This will give you more control of your tax bill when retired.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.