Whether you’re saving, investing, spending, bequeathing, or receiving wealth, there’s scarcely a move you can make without considering how taxes might influence the outcome. No wonder people get nervous when there’s lots of talk about higher taxes, but little certainty on what may come of it, and who it might affect.

How do we plan when we cannot know? The particulars may evolve, but it seems there are always an array of tax breaks to encourage us to save toward our major life goals—such as retirement, healthcare, education, emergency spending, charitable giving, and wealth transfer.

Today I am going to talk about some of these “tools of the trade”, as well as some techniques for using them.

TOOLS

Saving for Retirement

The good news about saving for retirement is there are plenty of options for tax-favored savings accounts for this purpose. There are several employer-sponsored plans, like the 401(k), 403(b) and SIMPLE IRA. There also are individual IRAs you establish outside of work. For both, there are traditional and Roth structures available.

In any of these types of retirement accounts, your dollars can grow tax-free while they remain in the account. This helps your retirement assets accumulate more quickly than if they were subject to the ongoing taxes that taxable accounts incur annually (on dividends and interest) along the way.

Tax treatments for different types of retirement accounts can differ dramatically from there. Each account type has varying rules about when, how, and how much money you can contribute and withdraw without incurring burdensome penalties or unexpected taxes owed.

Saving for Healthcare Costs (HSAs)

The Healthcare Savings Account (HSA) offers a rare, triple-tax-free treatment to help families save for current or future healthcare costs. You contribute to your HSA with pre-tax dollars; HSA investments then grow tax-free; and you can spend the money tax-free on qualified healthcare costs. That’s a good deal. Plus, you can invest unspent HSA dollars, and still spend them tax-free years later, as long as it’s on qualified healthcare costs.

There are some catches. Most notably, HSAs are only available as a complement to a high-deductible healthcare plan, to help cover higher expected out-of-pocket expenses.

Employers also can offer Flexible Spending Accounts (FSAs), into which you and they can add pre-tax dollars to spend on out-of-pocket healthcare costs. However, FSA funds must be spent relatively quickly, so investment and tax-saving opportunities are limited.

Saving for Education (529 Plans)

529 plans are among the most familiar tools for catching a tax break on educational costs. You fund your 529 plan(s) with after-tax dollars. Those dollars can then grow tax-free, and the beneficiary (usually, your kids or grandkids) can spend them tax-free on qualified educational expenses.

Saving for Giving (DAFs)

The Donor-Advised Fund (DAF) is among the simplest, but still relatively effective tools for pursuing tax breaks for your charitable giving. Instead of giving smaller amounts annually, you can establish a DAF, and fund it with a larger, lump-sum contribution in one year. You then recommend DAF distributions to your charities of choice over future years. Combined with other deductibles, you might be able to take a sizeable tax write-off the year you contribute to your DAF—beyond the currently higher standard deduction.

There also are many other resources for higher-end planned giving. For these, you’d typically collaborate with a team of tax and legal professionals to pursue your tax-efficient philanthropic interests.

Saving for Emergencies

There also are a variety of tax-friendly incentives to facilitate general “rainy day fund” saving, and to offset crisis spending, like the kind many of us have been experiencing during the pandemic. These include state, federal, and municipal savings vehicles, along with targeted tax credits and tax deductions.

Saving for Heirs

Last but not least, a bounty of trusts, insurance policies, and other estate planning structures help families leverage existing tax breaks to tax-efficiently transfer their wealth to future generations.

With recent negotiations over the tax treatment on inherited assets, families may well need to revisit their estate planning in the years ahead. In fact, whether times are turbulent or tame, there’s always an array of best practices available. We aim to reduce your lifetime tax bills by leveraging these tools to maximum effect.

TECHNIQUES

It’s one thing to have the tools. It’s another to make best use of them. So now let’s talk about some of the tax-planning techniques.

Tax breaks come and go, and are beyond our control. But with a tailored, tax-wise strategy in place, it’s easier to adjust as needed, rather than having to start all over whenever something changes.

Tax Planning: The Big Picture

Not unlike that fine painting, your best tax-planning efforts include meticulous attention to the details, as well as to how each action contributes to your big picture.

We view effective tax planning as a way to reduce your lifetime tax bill—or beyond, if you’re preparing for a tax-efficient wealth transfer to your heirs.

In short, tax planning is best considered an ongoing campaign. It’s staged on multiple fronts, and makes best use of the tools described above.

Leading with Tax-Wise Investing

One of the most powerful ways to ward off excess taxes is to be tax-wise about your investing every step of the way. And yet, few investors take full advantage of the many opportunities available at every level. These levels include how you manage your investment accounts, select individual holdings, and buy and sell those holdings along the way.

As you manage your investment accounts …

Are you doing all you can to build, manage, and spend down your taxable and tax-sheltered accounts for maximum lifetime tax-efficiency?

Building: Are you maxing out your contributions to appropriate tax-sheltered accounts? The more money you hold in various tax-sheltered structures, the more flexibility you’ll have to delete or defer taxes otherwise inherent in building wealth.

Managing: Are you being deliberate about your asset location, dividing your various assets among your taxable vs. tax-sheltered accounts for overall tax efficiency? Ideally, you use your tax-sheltered accounts to hold your least tax-efficient holdings, while locating your most tax-efficient holdings in your taxable accounts.

Spending: When the time comes to spend your wealth, have you planned for how to tap your taxable, tax-deferred, and tax-free accounts? There is no universal answer to this critical question. Cash-flow planning calls for a deep familiarity with the accounts and assets you’ve got; the particular rules involved in deploying each; and your particular spending goals.

As you select individual holdings …

Are you being deliberate about selecting tax-efficient vehicles? Even when different funds share identical investment objectives, some may be considerably better than others at managing their underlying holdings. Seek out efficient tax-management strategies, including:

Patient Investing: Many funds try to “beat” the market by actively picking individual stocks or timing their market exposures. We suggest using funds that instead patiently participate in their target market’s long-term expected growth. This not only makes overall sense, but it’s also typically more tax-efficient.

Tax-Managed Investing: For your taxable accounts, some funds are deliberately tilted toward tax-friendly trading techniques such as avoiding short-term (more costly) capital gains, and more aggressively realizing capital losses to offset gains.

As you buy and sell holdings …

Like the funds you choose, are you also being patient and deliberate about your trading? Do you avoid excessive trading and short-term capital gains (currently taxed at higher rates)? Are you guided by a personalized investment plan? Bottom line, the fewer trades made, the better off you’re likely to be when taxes come due.

Harvesting Capital Gains and Losses

Having an investment plan also facilities the ability to identify and make the best use of tax-loss and tax-gain harvesting opportunities when appropriate.

Tax-loss harvesting typically involves:

1. Selling all or part of a position in your portfolio when it is worth less than you paid for it.
2. Reinvesting the proceeds in a similar (not “substantially identical”) position.
3. Optionally returning the proceeds to the original position after at least 31 days have passed (to avoid the “wash-sale rule”).

You can then use any realized losses to offset current or future gains, without significantly altering your portfolio mix.

Tax-gain harvesting involves selling appreciated holdings to deliberately generate taxable income. Why would you do that?

Remember, your goal is to minimize lifetime taxes paid. So, you may intentionally generate taxable income in years when your tax rates are more favorable. Similarly, you may want to preserve your tax-favored income for years when your rates are higher.

Basically, you’re sacrificing a tax return battle or two, hoping to win the tax-planning “war.”

Managing for tax-efficient investing is just one way we help families reduce their lifetime taxes. We also help integrate all of the above into your broad financial interests.

In my next post, I will discuss Tax-Wise Financial Planning. Stay tuned. And thanks for reading – doing so shows that you are serious about improving your own situation!

Brandon