Taxes may not be anyone’s favorite topic, but getting them right could save you serious money. The greater your income and savings, the more moving parts you have to consider, and the more opportunities you have to take advantage of. I guess that expression “mo’ money, mo’ problems” has some truth to it. But the good news is that this is a great (and manageable) problem to have!
So, what’s the strategy?
Start tax planning now, not when the filing deadline is looming. Sure, it might not sound thrilling, but neither does paying more taxes than you have to, right?
Why Strategic Tax Planning Is Essential
Here’s the deal– when you have a significant income and/or investment portfolios, you’re likely facing a more complex tax situation. Delaying tax planning isn’t just risky– its expensive.
Most people wait until tax season to deal with their taxes, but that’s like waiting until you’re famished to go to the grocery store. You end up spending more on things you didn’t really want. If you want to make sure your wealth stays your wealth, starting tax planning now is the way to go.
Five Key Strategies for Year-End Tax Planning
Here are the top tax strategies that can help you keep more of your money in your pocket and less in the IRS’.
1. Maximize Retirement Contributions (Using the Mega Backdoor Roth)
You may have heard of the traditional Roth IRA, but high-income earners often get frustrated when they realize they can’t contribute directly due to income limits. Enter the Mega Backdoor Roth—a clever loophole that allows you to get around these income restrictions and potentially sock away a lot more into your Roth IRA, growing your retirement savings tax-free.
Here’s how it works:
- The Setup: To take advantage of the Mega Backdoor Roth, you need access to an employer-sponsored 401(k) plan that allows after-tax contributions and in-service withdrawals or conversions to a Roth IRA.
- After-Tax Contributions: With a regular 401(k), you’re limited to $23,000 in pre-tax or Roth contributions for 2024 (or $30,500 if you’re over 50), but the overall 401(k) contribution limit—including employer matches and after-tax contributions—is $66,000 for 2023. This means you can contribute after-tax dollars beyond the standard limit, bringing your total contributions closer to that $69,000 max.
- The Conversion: Once you’ve made those after-tax contributions, you can convert them to a Roth IRA (or Roth 401(k)) either through an in-service withdrawal or a direct rollover. Since you’ve already paid taxes on the principal (the after-tax contributions), only the growth on these contributions will be taxable at the time of conversion.
- Tax-Free Growth: After the conversion, your money is in a Roth IRA, which means future growth and withdrawals are tax-free, as long as you follow the Roth IRA rules (like waiting five years and being over 59½ when you start taking distributions).
2. Take Advantage of Tax Loss Harvesting
Even the most successful investors encounter losses. But if you’re holding investments in a taxable account, those losses can work to your advantage. Tax loss harvesting is the practice of selling investments that have lost value to offset gains elsewhere in your portfolio. It’s a smart way to reduce your tax bill without fundamentally changing your investment strategy. Basically, this is taking some lemons out of your portfolio and using them to make tax lemonade.
For example, the IRS allows you to offset up to $3,000 of ordinary income with investment losses each year. If you’ve experienced market volatility, taking advantage of tax loss harvesting can help reduce the taxes you owe on capital gains or income. It’s a relatively simple process that can deliver big savings when managed properly.
3. Charitable Contributions—It’s Giving “Strategically”
Philanthropy is about more than just feeling good—it can also be an effective tax planning tool when done strategically. If you’re already making donations, consider how you can give in a way that maximizes the tax benefits. For example, gifting appreciated securities rather than cash allows you to avoid capital gains taxes on those investments. Neither you nor your charity of choice will have to pay capital gains taxes on the appreciation, making your giving all that much more impactful!
In addition, setting up a Donor-Advised Fund (DAF) allows you to make a large contribution now, take the tax deduction immediately, and distribute the funds to your favorite charities over time. This strategy not only maximizes the tax impact but also provides flexibility in your charitable giving. If you want to buy yourself the time to thoroughly research the charities you donate to, DAFs allow you to take the tax benefit now and still vet any organizations you wish to support.
4. Estate Planning and Gifting—Keep It In the Family
Wealth transfer is a key consideration for high-net-worth individuals, and smart estate planning can help you move assets to the next generation while minimizing taxes. One effective tool is the annual gift tax exclusion, which allows you to give up to $18,000 per recipient in 2024 without triggering gift taxes. This won’t save you money on your annual tax return, but you can rest easy knowing that the recipients of your gifts won’t have to pay taxes on your gift.
5. Roth Conversions
If you’re a high-income earner, consider a Roth conversion as a way to manage future tax liabilities. A Roth conversion involves shifting funds from a traditional IRA to a Roth IRA. You’ll pay taxes on the converted amount now, but any future withdrawals from the Roth IRA will be tax-free, provided you follow the rules.
This strategy is particularly useful if you expect your tax bracket to increase in the future (for example, if your taxable income will rise during retirement due to required minimum distributions). Converting now can lock in a lower tax rate and allow your Roth IRA to grow tax-free for years to come.
Three Advanced Strategies
For those with a more complex financial picture, here are a few advanced strategies:
1. Grantor Retained Annuity Trusts (GRATs)
If you have assets that are likely to appreciate significantly, consider using a GRAT to transfer that future appreciation out of your estate tax-free. By placing the asset into a GRAT, you “freeze” its value for tax purposes while allowing future growth to pass to your heirs without additional estate tax. This can be an incredibly effective strategy for those with large estates.
2. Private Placement Life Insurance (PPLI)
Private Placement Life Insurance is a less conventional but powerful tool. It allows you to grow assets within a life insurance policy, where they can grow tax-free, without the constraints of traditional insurance products. It’s a strategy worth considering if you’re looking for a way to manage tax-efficient growth on your investments while also providing a death benefit.
3. Tax-Efficient Investment Locations
Where you hold your investments can have a significant impact on your tax bill. Placing income-generating assets, like bonds, in tax-deferred accounts (such as IRAs) and keeping long-term growth assets, like equities, in taxable accounts can help optimize your portfolio. According to Vanguard, proper asset location can boost your after-tax returns by 0.20% to 0.75% annually.
Start Planning Today
Think of tax planning as a game where the key to winning is starting early. The earlier you begin, the more you can benefit from strategies that will minimize your tax burden and keep your wealth growing.
This mindset shift—from seeing taxes as a once-a-year headache to an integral part of your overall financial plan—can be transformative. When you take control of your tax situation, you take control of your financial future.
At Legacy Planning, we can help you get your plan together. See if we can work together to improve your tax strategy: click here to schedule a conversation today and keep more of what’s yours!
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.
Legacy Planning does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
