1. Maximize your 401(k) contribution.
If you’re still working and your company offers a 401(k) or similar defined contribution plan, contribute up to the maximum. For example, you can contribute up to $18,000 in a 401(k) in 2016. If you’re in the 35% tax bracket, you’ll reduce your tax bill this year by $6,300. Plus, your money will grow tax-deferred until you start withdrawing it.
2. If you’re over 50, make a “catch up” contribution.
The IRS allows people over 50 to make additional “catch-up” contributions in certain types of retirement plans. For example, in a 401(k), you can make an additional $6,000 contribution for a total of $24,000. At a 35% tax rate, you’ll cut your tax bill by $8,400. If you’re a super high earner, some of these tax benefits may be phased out so it makes sense to check with a financial advisor to see how much you can save in your particular situation.
3. Donate a portion of your IRA to charity.
Generally speaking, when you withdraw money from your IRA it’s taxed as ordinary income. However, if you don’t need the money, you can donate it directly to a charity and never pay tax on it.
If you’re over 70 ½, you have to take an annual required minimum distribution from your IRA—and that’s generally taxable to you. However, if you donate that distribution directly to charity, you pay no taxes on the distribution. The government encourages charitable giving and if you have extra money, you can help a charity and save money on taxes.
4. Pass along highly-appreciated assets to your heirs.
If you own stock or some other investment asset that has appreciated greatly in value, you can pass it along to your heirs through inheritance and they get what’s called a “step up in basis.” This means when they inherit the asset, they don’t have to pay any tax on the gain in that asset that accrued while you owned the asset.
For example, if you owned a stock for 20 years and it grew in value from $100,000 to $300,000, the capital gain is $200,000. And if you sold that stock, you’d have to pay taxes on $200,000. However, if your heirs inherited that stock, their new cost basis would be $300,000 and they would not owe any tax on the $200,000 capital gain. This is a great way to pass along assets to the next generation and help them save money on taxes.
5, Turn ordinary income into long-term capital gains.
Just like giving to charity, the government encourages us to be long-term investors. As a result, if you hold certain investments for more than 12 months, your capital gains are taxed at a lower rate.
For example, if you’re in the 25 – 35% tax bracket and you hold your investments for at least 12 months, your capital gains are taxed at a 15% rate instead of your ordinary income rate of 25 – 35%. On a $50,000 capital gain, that could save you $5,000 to $10,000.
Warren Buffett, the second richest person in America, says his tax rate is less than his secretary’s. How can that be? It’s because almost all of his income comes from capital gains which is taxed at a preferential rate. He pays himself $100,000 per year to run Berkshire Hathaway and the bulk of the rest of his income (reportedly about $40 million in 2010), comes from capital gains.
We work closely with our clients to monitor this short-term/long-term capital gains issue and strive for long-term gains to help minimize your taxes.
Do Proactive Planning to Save Money on Taxes
Smart, proactive planning can save you thousands of dollars in taxes. Plus, you can give to charity or support your heirs and help them save money on taxes. Any way you look at it, proactive planning is a smart move.
Give Us a Call
If you’d like to discuss how to save money on taxes, please give our office a call at (913) 624-1841 or send me an email at firstname.lastname@example.org. We are here to help you.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.
The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.
The Amazon Best Seller ranking listed on marketing materials is specifically referring to Best Seller rankings for the Kindle Top 100 Paid Lists under the subcategories of: Budgeting and Financial Risk Management, based on data as of September 5, 2019. Amazon rankings although relevant on how a product is selling overall doesn’t necessarily indicate how well an item is selling among other similar items or similar item categories. Amazon may choose the most popular categories or subcategories within which an item has a high ranking to determine its best seller rankings. These rankings are updated hourly and as a result, should be expected to fluctuate as such. Keen Wealth Advisors and Amazon are not affiliated entities.
The Steve Sanduski Advisor Network, Belay Advisor, LLC and other third-party contributors to our blogs and podcasts are not affiliated with Keen Wealth Advisors.
For additional details on Keen Wealth Advisors, please visit https://www.keenwealthadvisors.com/important-disclosures.