Tax Optimization and Common Strategies

Quick Look

  • Optimizing your tax situation in a legal and ethical way ensures more of your money is spent on what you value.
  • Due to the complexity of tax law and your unique situation, working with a Certified Financial Planner (CFP), Certified Public Accountant (CPA), or lawyers who specialize in tax-related issues, is an essential part of managing your tax burden – particularly when you’re in a state of financial independence or abundance.
  • Understand common concepts like Roth conversions and charitable contributions. Plan to discuss these and more with a professional advisor.

Why Optimize Your Taxes?

Optimizing your taxes does not mean skirting your legal obligations or playing by a different set of rules than everyone else. Instead, tax optimization is about making a plan to ensure your resources are put to their best use. 

Reasonable people differ in their opinions about how the tax system should be structured to optimize for fairness and impact. But none of this changes a central fact: When it comes to making an impact with your financial resources, you can only do so with the resources in your control. That may be as simple as providing for a certain kind of lifestyle or as grand as starting a charity.

Whatever the case, when you’ve reached financial abundance, your assets will have an impact one way or another. Therefore, you may as well take a bit of time to consciously optimize how they are structured and used.

Why Work with a Tax Professional?

The U.S. tax code is close to 3,000 pages to over 70,000 when regulations and guidelines are factored in. 

But regardless of how many thousands of pages the tax code actually is, a few fundamental truths stand out:

  • Taxes are complex. Even those with relatively simple tax situations have encountered questions about how to correctly file their taxes. When assets are more significant and diversified, complications can arise long before a tax filing deadline is even considered.
  • You have choices. Many choices you’ve made about how to structure your finances may have been done for reasons other than tax optimization. Nonetheless, these arrangements (e.g. insurance, annuities, trust etc.) may have tax implications. It’s important to understand what choices are available and have a clear understanding of how they may affect your situation.
  • Professionals can help. Unless you’re already a tax professional, working with a Certified Financial Planner (CFP), Certified Public Accountant (CPA), or a lawyer who specializes in tax-related issues, is a great way to help you sort through the complexities and choices of tax planning and preparation. Their services will more than pay for themselves in the form or a reduced tax burden, or, at the very least, peace of mind that you’ve thought through all your options.

Common Concepts to Discuss with a Tax Professional

There is no way an app like MoneySwell could know enough about your situation to provide detailed tax optimization guidance. This is where working with a CFP or other professional comes in. However, below is a list of three common ideas worth familiarizing yourself with. While not comprehensive, these topics can be a good starting place when you meet with a financial professional.

  • Roth Conversions: This can take a few different forms. But the basic concept is that investments in a “Roth” retirement account are not taxed. Therefore, converting some assets in a non-Roth account to a Roth account may be beneficial. Of course, while you won’t be responsible for paying taxes on income from this Roth account after the conversion, when the conversion is first made you may have a tax liability. Often, individuals try to time Roth conversions in years where losses or other tax credits will offset some portion of the tax liability of the converted assets.
  • Charitable Contributions: Donations made to registered 501(c)(3) Charitable Organizations typically qualify the doner for a like amount in reduced taxable income. While most of us are very familiar with this concept, a tax professional may alert you to additional options. For example, setting up a Charitable Remainder Trust (CRT) has the potential to provide a tax free income while also designating any leftover amount at the time of your death to your predetermined list of charitable organizations.
  • 529 Plan Funding: If you have children or grandchildren, you’re likely familiar with a 529 Plan. And when you have significant financial assets, the concept of “Superfunding” a 529 plan may come into play. The website Saving For College has a detailed article on the concept but the basic idea is that you can help your heirs pay for college while reducing your tax burden at the same time.

Finish Strong

You’ve worked hard to reach the stage of financial abundance. You now have an opportunity to set things up such that your money works for you and your values. Therefore, now is not the time to sit back and let things happen. Only by taking an active role in managing your financial abundance, can you maximize its impact.

Share this content!

MoneySwell’s content and action plans are designed for educational purposes only. Please read our Terms of Service for more information.