At Fairview we consider our clients’ income, assets, and goals when discussing strategies to minimize taxes as much as possible. We also review tax sheltered investment options. Here are some examples.
1. Maximize your 401(k) contribution
If you have access to a 401(k), you should consider maximizing your contribution. The contribution limit for the 2024 tax year is $23,000. If you are 50 or older, you can contribute what the Internal Revenue Service terms a “catch-up” contribution of another $7,500, so your total contribution for the year can equal $30,500.
Contributions to a conventional 401(k) are taken out pretax, effectively lowering your taxable salary and possibly your tax bracket. In addition, the contributions grow tax-free until you withdraw them at retirement. Finally, if you are employed by a company that offers a matching 401(k), they will match a percentage of your own contribution, which is free money in your retirement coffers.
Many companies now offer a Roth 401(k) which allows you to contribute after-tax money. Although you don’t receive a tax benefit in the year you make your contribution, your money grows tax free and will be tax free when you withdraw it in retirement.
2. Maximize your IRA contribution
If you don’t have access to a 401(k), remember that all tax-advantaged retirement accounts could help your overall taxation picture. For 2024, Individual Retirement Accounts (IRA) contributions are capped at $7,000 per year (with an additional $1,000 for a catch-up contribution if you’re 50 and over) and are deducted from your adjusted gross income (AGI) at tax time. Traditional IRA contributions also grow tax-free until they are withdrawn at retirement.
3. Convert your traditional IRA to a Roth IRA
Roth IRAs are a potential strategy to minimize your taxes in retirement while taking advantage of tax-free growth. In a Roth, your contribution is not tax-deductible because you make the contribution from already taxed income. But because it is taxed in the year of contribution, you don’t owe taxes when you withdraw it in retirement, as long as you have owned it for five years and are a minimum of 59½ years of age.
But high net worth individuals can’t necessarily contribute outright to a Roth IRA. If you are single, head of household, or married filing separately (and you did not live with your spouse at any time during the year) and you earn greater than or equal to $161,000 in 2024, you have phased out of eligibility to contribute to a Roth.
In coordination with our clients’ tax professionals, we consider if it makes sense to convert Traditional IRA funds into a Roth IRA. This is often most beneficial in lower income years or between retirement and the start of Social Security income.
4. Contribute to tax-advantaged educational savings accounts
Tax-advantaged educational savings plans like 529s can help your children and grandchildren pay for qualified educational expenses such as tuition. Note that this can be used for higher education, and $10,000 can also be used for K-12. 529 contributions grow tax-free as long as they are used for qualified educational expenses when withdrawn.
5. Offset any capital gains with losses
Tax loss harvesting is a strategy to realize the losses in an investment. You can then use these losses to offset capital gains, reducing your capital gains taxes or avoiding them entirely. Coordinating all your investments within a given tax year enables you to be tax efficient across your portfolio.
6. Utilize a Health Savings Account
If you have a high-deductible health insurance plan, a Health Savings Account (HSA) offers many benefits. For the 2024 tax year, you can contribute up to $4,150 to an HSA if you’re single and $8,300 for a family.
The first tax advantage is that HSA contributions are taken out pretax and grow tax-free until you withdraw the funds. The second is that no tax is imposed on withdrawals for qualified medical expenses. The third is that you can contribute an additional $1,000 if you are aged 55 or above.
HSAs are portable and there is no time limit on withdrawals, as there may be with other types of health accounts like Flexible Savings Accounts (FSAs). You can carry the money into your retirement for as long as you like.
7. Maximize your charitable giving
Giving to a qualified charity can lower your taxable income. You can deduct charitable donations of as much as 60 percent of your AGI.
While your donations can be taken out of your earnings, don’t overlook that contributions of assets and items can also be made. You can also take a tax deduction on as much as 30 percent of appreciated assets such as stocks, real estate, stock options, and more.
For clients who are charitably inclined, we help them select highly appreciated stocks as good candidates for donating to a charity or donor advised fund.
8. Invest in municipal bonds
Within the bond asset class, municipal bonds are an excellent tax strategy because they offer tax-free income. Some municipal bonds are only free of Federal tax, but holders of other municipal bonds don’t pay state, local, or Federal taxes. We consider the after-tax yield of municipal bonds when determining if they should be part of a client’s portfolio.
How a Marin County CERTIFIED FINANCIAL PLANNER™ Professional Can Help
High-net-worth individuals can benefit from employing tax strategies to make sure they are optimizing their tax planning. A CERTIFIED FINANCIAL PLANNER™ Professional can craft a comprehensive financial plan for you that is tax-advantaged for your particular situation. Fairview Capital strives to provide the highest level of personalized wealth management services and professional investment advisory expertise. Contact us today for more information.
The information contained in this communication is provided for general purposes only, and was prepared in reliance on independent, third-party sources that Fairview Capital Investment Management, LLC (“Fairview Capital”), an SEC-registered investment adviser, believes are reliable. Nevertheless, Fairview Capital does not guarantee its accuracy or timeliness of any information provided herein. The information reflects subjective judgments, assumptions and Fairview Capital’s opinion on the date made and may change without notice; Fairview Capital is not obligated to update this information. Nothing in this communication should be construed as investment or tax advice, a solicitation, offer, or recommendation, to buy or sell any security. Investment management services are offered only pursuant to a written investment management agreement, which investors are urged to carefully read and consider in determining whether such agreement is suitable for their individual needs and circumstances. The information in this communication should not be construed as an endorsement, recommendation or sponsorship of any company or security. If this post mentions a specific investment or security, we or our affiliates may have a position in that security (either long or short), and we may profit from a price change in that security.
Investment management and advisory services–which are not FDIC insured–are provided by Fairview Capital. Any links provided to other sites are offered as a matter of convenience and are not intended to imply that Fairview Capital or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Please see Fairview Capital’s Form ADV Part 2A and Form CRS for important details.
