Every Case is Special

They say nothing is certain in life but death and taxes. As fiduciaries, we can name one more certainty in life: no one wants to pay more taxes than required, and everyone wants to know how to pay less. After retirement, tax planning is the issue most focused on by our clients. But because the topic is rife with rules, caveats, and “if / thens,” it’s difficult to write about tax planning for a general audience. 

Despite the fact that tax planning necessitates a customized approach, there are some universal truths about tax planning: 

  • The work of tax planning almost always has to be done proactively, not reactively.
  • Tax planning strategies will vary considerably from person to person, and also from year to year
  • Every strategy must take into consideration the tax benefit in the current tax year and how that will affect future taxes. There can be tradeoffs. 

Consider these scenarios:

Saving now in a tax-deferred vehicle (such as a 401(k), 403b, traditional IRA, annuity) means you save some taxes in current years, but you’ll have to face Uncle Sam later on. With this strategy, you’ll want to ask your financial advisors.

    • When I do have to pay taxes on these savings, will tax rates be higher?
    • Will pre-tax savings limit my options and lower my optimal withdrawal rate in retirement?

Alternatively, saving in a tax-free growth vehicle means you pay more taxes now, but save more for later. Still, this strategy comes with its own set of questions:

      • How exactly does this plan serve you in retirement?
      • What are the current tax rules for Roth IRAs and how does that affect your income withdrawal rate in retirement?

For business owners, tax strategies are a whole different ball game. Business owners lose a lot of their income to taxes, but they also have a lot more options for how to structure their business. Here are tax planning questions a business owner may want to ask:

    • Should my business be a C Corp, S Corp, LLC, or Sole Proprietor?
    • How are my business taxes affecting my personal tax situation?
    • Does my CPA really understand the nuances & rules of tax code within my particular industry (be that running a restaurant or a car dealership)?

Ultimately, the best tax planning strategy is to have multiple approaches each and every year. At Erickson Advisors, we recommend focusing on current tax savings and utilizing the current tax code to your benefit while also staying attuned to what works best as you head into retirement and legacy planning. Often, it’s best to diversify account types so that all of your wealth isn’t creating taxable income and large required taxable distributions later in life. Just like cash and a lack of debt offer financial freedom, so do tax-free invested savings. The goal is to have some of your money in tax-deferred savings, some in tax-free growth vehicles, and some in accounts that only have capital gains tax each year. 

If you’re ready to start thinking more seriously — and creatively — about tax planning to increase your savings, then now’s the time for you to take our Plan Now, Live Now approach. We use focused and purposeful planning with consistent annual reviews to help you build all those buckets of savings and come out right where you want to be.

 

 


The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor.  Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

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