High Income? Time for a Team

Preparing a financial plan that is both comprehensive and tax-efficient might feel daunting at first. Thankfully, there are some things you can do now to manage your financial life and keep from overpaying your taxes.

Build Your Team of Professionals

Building a team is crucial for any number of situations, from organizing a project to managing a business. In fact, we all build teams in most aspects of our life; personal and business. It’s important to remember that a team is not just a collection of people but more importantly a combination of talents working together for a common goal.

Building a team to manage your financial life is important for the same reason and means involving more than one person with complementary experience and skills. For example, Ryan is not only a CPA but also holds a CFP designation (Certified Financial Planner) and as such, is an expert in a wide range of financial planning issues. I hold a CFA designation (Chartered Financial Analyst) and specialize in portfolio management. Neither of us prepares tax returns, but we have the experience to work closely with your tax preparer and attorney. Working together as a team, we help our clients build a winning financial strategy and incur the least amount of tax due across all aspects of their financial life.

Tax-Focused Investment Strategies

Once you have the right team of professionals who understand your financial situation, there are some strategies you may consider using this year.

Backdoor Roth IRA

If you are a high earner with an income above the IRS’s income limit for Roth IRA accounts, you still have the option to create a backdoor Roth IRA. Just as it sounds, this option allows high earners to bypass the income limits and still utilize the tax advantages of a Roth IRA account.

To create a backdoor Roth IRA, you’ll need to:

1. Open and contribute to a traditional IRA.
2. Convert your traditional IRA to a Roth IRA account (your account administrator will provide the necessary paperwork and instructions to do this).
3. Once tax season rolls around, pay taxes on the contributions (essentially, you’re paying back the tax deduction you received when initially contributing to your traditional IRA). 
4. Pay taxes on any additional gains your traditional IRA account may have made over time.

A backdoor Roth IRA may be beneficial for those whose income level is above the ceiling limit set by the IRS. Additionally, it’s important to remember that Roth IRAs do not have required minimum withdrawals, only traditional IRAs do.

When considering a backdoor IRA, evaluate the tax obligations you might pay today versus the tax benefits you may realize toward retirement. It is also worth mentioning that this particular strategy is in danger of being eliminated by Congress, so be sure to check with us before executing a backdoor Roth on your own.

Tax-Focused Gifting

Smart moves can help you manage your taxable income and taxable estate. For instance, if you’re making a charitable gift, giving appreciated securities that you have held for at least a year is one choice to consider. In addition to a potential tax deduction for the fair market value of the asset in the year of the donation, the charity may be able to sell the stock later without triggering capital gains. 

This discussion of tax-focused giving is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your financial, tax, and legal professionals before modifying your gifting strategy. 

The annual gift tax exclusion gives you a way to remove assets from your taxable estate. You may give up to $16,000 ($32,000 if you are married) to as many individuals as you wish without paying federal gift tax, so long as your total gifts keep you within the lifetime estate and gift tax exemption of $12.06 million for 2022.¹ Managing through the annual gift tax exclusion can involve a complex set of tax rules and regulations. Before adjusting your strategy, consider working with a professional who is familiar with the rules and regulations.

Tax-Loss Harvesting

Tax-loss harvesting refers to the practice of taking capital losses (you sell securities worth less than what you first paid for them) to help offset the capital gains you may have recognized. Keep in mind that the return and principal value of securities will fluctuate as market conditions change, and past performance is no guarantee of future returns. While this doesn’t get rid of your losses, it can be an approach to managing your tax liability.

Up to $3,000 of capital losses in excess of capital gains can be deducted annually, and any remaining capital losses above that can potentially be carried forward to offset capital gains next year.² But remember, tax rules are constantly changing, and there is no guarantee that the treatment of capital gains and losses will remain the same in the coming years.

By taking losses this year and carrying over the excess losses into the next, you can potentially offset some (or maybe all) of your capital gains next year. Before moving ahead with a trade, it’s important to understand the role each investment plays in your portfolio.

We automatically manage the tax-loss harvesting process for our clients. If you’re looking to implement this strategy yourself, make sure to be familiar with the IRS’s “wash-sale rule.” This rule states that investors can’t claim a loss on a security if you buy the same or a “substantially identical” security within 30 days before or after the sale.²

These are just some of the tax-saving ideas that Ryan and I help our clients with every day. If you are interested in fielding a team to help you manage your financial life, schedule a meeting so we can show you how we can help.