Effective tax planning can enhance Investment returns... And...
Zach Melloh, CFP®@zachmelloh26
44 views
Nov 27, 2024
~3 min read
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Effective tax planning can enhance Investment returns...
And Vanguard says tax loss harvesting alone can boost returns by up to .50 annually
Yet it seems almost everyone is neglecting it
10 of my favorite financial planning strategies for high earners:
And Vanguard says tax loss harvesting alone can boost returns by up to .50 annually
Yet it seems almost everyone is neglecting it
10 of my favorite financial planning strategies for high earners:
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2. Bookmark and save the first post 🙏
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1. Qualified Plan Contributions / Choosing "When" to pay the bill
Traditional: Defer tax now, pay the income tax in retirement, subject to RMD's in retirement at age 73
Roth: Pay tax now, grow tax free, no RMD's in retirement
Traditional: Defer tax now, pay the income tax in retirement, subject to RMD's in retirement at age 73
Roth: Pay tax now, grow tax free, no RMD's in retirement
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Rules of thumb:
- The lower your present income, and longer your time horizon, the more powerful roth becomes
- Marginal rate > 32%, it may be better to invest in the Pre-Tax account because of the up front deduction it provides
- The lower your present income, and longer your time horizon, the more powerful roth becomes
- Marginal rate > 32%, it may be better to invest in the Pre-Tax account because of the up front deduction it provides
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2. Backdoor Roth Contributions
Roth IRA income restrictions phase out quickly... (230k for Married filing jointly in 2024)
But there is away around this if you are over the income limit:
Roth IRA income restrictions phase out quickly... (230k for Married filing jointly in 2024)
But there is away around this if you are over the income limit:
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1) Non-deductible IRA contribution (Consider pro-rata and IRA aggregation rules)
2) Convert the money from the IRA to a Roth IRA
3) File Form 8606
2) Convert the money from the IRA to a Roth IRA
3) File Form 8606
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3. Asset location in 30 seconds:
- Highest growth investments -> Roth
- Conservative / income producing assets - > Pretax (IE: Taxable bond allocation)
Reason: You’ll have to pay income tax on the balance when you withdraw
- Tax efficient assets - > Brokerage
- Highest growth investments -> Roth
- Conservative / income producing assets - > Pretax (IE: Taxable bond allocation)
Reason: You’ll have to pay income tax on the balance when you withdraw
- Tax efficient assets - > Brokerage
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4. Mega-Backdoor Roth Many high earners don't know it exist, and many plans don't allow for it...
But the Mega-backdoor allows for roth contributions far in excess of normal limits...
To participate your plan must allow for:
But the Mega-backdoor allows for roth contributions far in excess of normal limits...
To participate your plan must allow for:
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1. After-tax contributions
2. Roth transfers or conversions
There are two ways to do this, and your plan must allow for it:
1) In-service distributions or
2) In-plan Roth conversions
2. Roth transfers or conversions
There are two ways to do this, and your plan must allow for it:
1) In-service distributions or
2) In-plan Roth conversions
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5. Roth Conversions
Roth conversions allow you to pay tax on pre-tax dollars now...
The benefit?
You get to decide when you pay the tax...
Roth conversions allow you to pay tax on pre-tax dollars now...
The benefit?
You get to decide when you pay the tax...
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Ideally you do so in an abnormally low-income year
Once it’s converted to Roth:
- Enjoy tax free growth
- Never subject to RMD's
Once it’s converted to Roth:
- Enjoy tax free growth
- Never subject to RMD's
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6. HSA's (If you're in a high deductible health plan) Here are some of the features that make it great:
- Easy to open
- Reduce taxable income now ($8,300 Family in 2024) - Funds can be invested / grow tax free
- Can be withdrawn tax free if used for future health care costs
- Easy to open
- Reduce taxable income now ($8,300 Family in 2024) - Funds can be invested / grow tax free
- Can be withdrawn tax free if used for future health care costs
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Note on HSA's: Most effective when paying out pocket for medical expenses, and let your account grow tax deferred/tax free for medical expenses
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7. Tax Loss Harvesting
Example:
You purchased $10,000 of ABC stock & now it’s worth $6,000 & unlikely to recover for the foreseeable future
You sell ABC stock locking in the $4,000 loss
You use the losses to offset $1,000 of capital gain from the sale of XYZ stock
Example:
You purchased $10,000 of ABC stock & now it’s worth $6,000 & unlikely to recover for the foreseeable future
You sell ABC stock locking in the $4,000 loss
You use the losses to offset $1,000 of capital gain from the sale of XYZ stock
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And the remaining $3,000 can be used as a deduction on your tax return against ordinary income
You’ve Effectively Saved Taxes in Two Ways:
1. Reduced Capital Gains Tax
2. Reduced Ordinary Income Tax
You’ve Effectively Saved Taxes in Two Ways:
1. Reduced Capital Gains Tax
2. Reduced Ordinary Income Tax
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8. 529 contributions Saving for college: Tax advantaged Some states offer a tax deduction for contributions to in-state plans
Other States, offer a tax CREDIT Investments grow tax deferred Withdrawn tax free for education expenses
Other States, offer a tax CREDIT Investments grow tax deferred Withdrawn tax free for education expenses
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9. Charitable giving Some ideas to consider:
- Donor advised funds
- Donating highly appreciated securities
- *Bunching charitable donations* *because of increased standard deduction*
- Donor advised funds
- Donating highly appreciated securities
- *Bunching charitable donations* *because of increased standard deduction*
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10. Equity comp planning
- ISO's & NSO's
- RSU's
- ESPP's
Each have their own tax consequence and timeline... & understanding how they're taxed can not only save you on taxes...
- ISO's & NSO's
- RSU's
- ESPP's
Each have their own tax consequence and timeline... & understanding how they're taxed can not only save you on taxes...
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What financial planning strategies are you utilizing?
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