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Taxes are usually the last thing people want to think about. And for most of us, taxes are a necessary evil, so we pay them and move on to more interesting topics.
However, for anyone looking to retire comfortably, taxes are a critical part of planning. With the right tax planning strategies in place, you can protect your income and greatly reduce your tax burden.
At Charles R. Green and Associates, Inc., our team of financial planners is focused on pursuing your financial dreams. We work with you to plan and manage your financial life in a way that benefits you today and tomorrow.
Tax planning is the analysis of your personal and/or business financial situation from a tax savings perspective. This means you will be aware of tax laws and incentives that can save you money, and make informed and strategic decisions about how to invest, save, and spend.
Ultimately, tax planning allows you to determine what you can do, within the law, to reduce your taxes and maximize your after-tax income.
While the amount of tax you pay depends on your income, there are many ways to reduce your effective tax rate. Here is a summary:
Let us now get into this in more detail.
Tax planning is important because it helps you ensure that you don't pay more than you have to in taxes. Through it, all elements of the financial plan work together in the most tax-efficient manner possible.
Although we cannot avoid taxes entirely, there are steps you can take to minimize them and make sure you're getting the most out of your money.
Here are various tax planning strategies you can use to reduce your tax liability:
Depending on your situation, there are various ways you can reduce the amount of income that is subject to federal income taxes:
If your employer offers a 401(k) plan, contribute as much as you can up to the annual limit. Not only does it lower your taxable income now, but it also provides a tax-deferred vehicle for retirement savings.
In addition, individuals who participate in these types of plans also receive an employer match which provides additional investment returns that are not subject to taxes until withdrawn.
A Roth conversion is when you convert funds from a traditional IRA or other qualified retirement plans into Roth IRA assets.
This may be advantageous for those who do not qualify to make Roth IRA contributions due to the income limitations placed on these types of accounts. A conversion allows you to pay tax today on your investment earnings so you can withdraw these funds in retirement entirely tax-free.
An optimal withdrawal strategy maximizes a retiree's after-tax, average annual spending power over their lifetime. The goal is to minimize the chance of running out of money before death by efficiently balancing three variables: life expectancy, inflation, and marginal tax rates (MTR).
Good tax planning strategies will not only reduce the amount you pay in taxes but can also help put more money into your pocket to meet your financial goals. A good financial planner can help you determine what types of tax deductions and credits you qualify for, as well as help you devise a plan that will minimize your income tax in future years.
Whether you want tax planning for retirement or simply for reducing your tax bill, our financial experts at Charles R. Green and Associates will help you develop a strategy to provide long-term economic benefit. Contact us today for more information.