Proactive Tax Planning for Your Financial Future

When constructing your portfolio, we always take into account the tax status of your investments to determine the optimal investment direction. Portfolios are broadly divided into after-tax and pre-tax accounts. When planning rotations or changes, we always view your after-tax accounts through a tax-sensitive lens to avoid incurring unnecessary capital gains.

Where appropriate, we also execute tax-loss selling toward the end of each calendar year. In these situations, recognizing short-term losses is a powerful tool to offset capital gains or other income recognized during the year.

A Roth IRA is structurally similar to a traditional IRA in that it allows you to invest in a tax-sheltered vehicle. The primary difference is that a Roth IRA is funded with after-tax dollars, while a traditional IRA is funded with pre-tax dollars.

In a Roth conversion, you convert a portion of your IRA into after-tax dollars by paying the ordinary income taxes owed on the withdrawal and moving those funds into a Roth IRA. To develop an effective conversion strategy, we forecast your future income taxes based on expected earnings and tax policy.

For the strategy to work effectively, you need a period where you'll owe relatively little in income taxes. Every dollar withdrawn from a traditional IRA counts toward income taxes, so there's a natural limit to how much can be converted. We call this "filling up tax brackets," meaning you convert up to what you anticipate your longer-term tax bracket will be.

Roth conversion strategies are a powerful, effective tool for targeting when you pay taxes on your retirement accounts. Reach out to us to see if this strategy is right for you.

One of the biggest unknowns when forecasting income taxes in a financial plan is the impact of policy changes. While we can predict taxes with reasonable certainty over the next one to two years, larger revisions to the tax code become more likely the further out you look, especially over a 20 to 30 year horizon.

Our tools help us analyze how potential policy changes could affect your comprehensive financial plan. For example, we can model the sunsetting of tax provisions, changes to Social Security benefits, and shifts in income tax brackets. Get in touch to see how these changes could affect your financial picture.

As part of building your comprehensive financial plan, we forecast your income tax obligations based on your tax bracket, marital status, retirement plan contributions, and other relevant factors.

These forecasts let you compare different scenarios so you can see the impact of various tax strategies on your overall financial picture.