Ask an Advisor with Caleb Boy: Do you need to improve your tax strategy?
It is everyone’s favorite time of the year again – Tax time!
We have a saying at WSP that the number one thing we love to do is make our clients happy, and a close second is paying as little to Uncle Sam as possible. In all seriousness, tax planning is a very important room in your financial house. A great way to ensure you’re investing in a tax-efficient manner is to utilize tax-advantaged accounts. Below, you’ll find a few accounts we use consistently to help our clients meet their goals.
Traditional IRAs – The most popular type of IRA. The money that you put into this account is usually tax-deductible (depends on a couple of factors – make sure you understand them before contributing!) and it grows tax free. You must pay income tax on withdrawals in retirement, but the tax deferred growth and probable lower income tax bracket in retirement makes this a great vehicle. It can also be used to pay for qualified medical expenses, college expenses, and a few other exceptions before retirement. A great way to lower your taxable income now and invest for retirement.
SEP IRAs – The best IRA for self-employed persons. The SEP IRA operates similarly to a traditional IRA. Contributions are tax-deductible, and the account grows tax free until withdrawals in retirement. However, only the self-employed are eligible for this IRA. What makes this so great is that you can contribute 25% of your income up to $69,000 for 2024. For example, if you make $200,000 in 2024 as a 1099 employee, you can contribute 25% to a SEP and lower your taxable income by $50,000! Compared to a traditional IRA where you can only contribute $7,000 for 2024, this is a game-changer.
Roth IRAs – Perhaps the most popular IRA in recent history. Roths are very unique in the sense of tax avoidance. The downside is that you do not get a tax deduction for contributions, but you never pay taxes on that money again. It grows tax-deferred, and you can withdrawal in retirement tax-free. For example, if you contribute $7,000 to a Roth IRA every year from age 25 to age 65 and assume 7% average annual growth over that time, you will have almost $1.4M at age 65, all available without ever having to pay another cent in taxes on that money.
HSAs – HSAs are one of my personal favorite accounts. Contributions to an HSA are deductible, and proceeds can be invested in many HSA accounts. Assuming you are covered by a family HDHP, you can defer over $8,000 of taxable income by contributing to an HSA. HSA proceeds can be used for qualified medical expenses before age 65, and then after age 65, can be used for any expense. It is a great account to offset medical cost, invest for retirement, and reduce your tax burden.
Wondering if you can still contribute for 2024? You can! You have until the personal tax deadline (4/15) to contribute for 2024 and optimize your personal tax strategy. These accounts can do wonders for your financial house, but only if you use them properly and understand them. They have nuances and circumstances that must be met to ensure you will reap the benefits. If you are curious on how these topics apply to your financial house, give our office a call today at (615) 457-3481 or email me at caleb@wealthstrategiespartners.com so I can help!
Raymond James Financial Services, Inc. does not provide advice on tax or legal issues. These matters should be discussed with the appropriate professional.