We often think of filing taxes and tax planning as a confusing, headache-inducing exercise. Maybe it seems like the most boring thing on earth. At the same time, however, with some straightforward planning, you can potentially reduce your lifetime tax liability s and keep more of your hard-earned money working to build wealth over time.
Divided up into two phases (pre-retirement and post-retirement), we’ll cover some of the most common tax planning strategies.
Defer income with pre-tax contributions:
One of the most powerful tax-advantaged accounts available is the 401(k) for retirement. Other similar options include the 403(b) and the IRA (SIMPLE IRA, SEP IRA, Traditional IRA, Roth IRA). Contributing pre-tax dollars helps reduce today’s taxable income while allowing money to grow tax-deferred until retirement withdrawals begin. For 401(k)s in 2025, individuals can contribute up to $23,500 ($31,000 if over 50). This means that hypothetically, for an individual maximizing their contribution, in the 32% tax bracket, their total tax deferral this year could be as high as $9,920.
In addition, Health Savings Accounts (HSAs) are another tax-advantaged account. Contributions are tax-deductible going in, the money grows tax-free, and qualified distributions for medical expenses are entirely tax-exempt. Maximizing HSA contributions, when possible, creates a pool of tax-free money for healthcare costs in retirement.
Accelerate income with Roth contributions:
For individuals and families at the 24% marginal tax bracket or below (generally about $400,000 gross income or lower for couples, and $200,000 or lower for individuals), Roth contributions often make sense. Rather than saving tax up front, funds invested in Roth (Roth 401(k) or Roth IRA) grow tax-free (never to be taxed again) and have no age requirement to start distributing funds.
The major potential benefit of saving in a Roth, (along with no required minimum distributions in retirement) is the potential to pay taxes at a lower rate today rather than at a higher rate later, therefore creating “tax rate arbitrage.”
Lower income by bundling itemized deductions:
This strategy involves timing deductible expenses to maximize their tax impact. By planning and combining multiple years’ worth of deductible expenses (such as mortgage interest, charitable contributions, and property tax) in a single tax year, one can exceed the standard deduction threshold and claim a higher total deduction in one year and then claim the standard deduction in the next.
Lowering income with investment selection:
One way to lower taxable income is by choosing tax-aware investments. For folks in relatively higher income brackets (generally 32% marginal and above), municipal bonds are one way to earn income while taking relatively low risk and paying zero tax on the earnings. And for portfolios poised for growth (investing in stocks), taxable income can be lowered by mitigating capital gains and harvesting losses in securities.
Lowering income with Qualified Charitable Distributions(QCDs):
(QCDs) from your IRA can satisfy required minimum distribution (RMD) requirements while reducing taxable income. Eligible at the age of 70½ under current tax law, these distributions go directly to 501(c)(3) organizations and are not counted as taxable income.
Accelerating income with Roth conversions and harvesting capital gains:
While it may seem counterintuitive, sometimes it may make sense to raise income in certain years. Two primary ways this can be done are by converting pre-tax IRAs to Roth and realizing capital gains.
One common example of this strategy is when an individual retires before taking income from Social Security, pensions, or distributions from IRAs. While income is likely lower than it was before retirement, and lower than it might be after beginning required minimum distributions (RMDs) from IRAs, individuals can “fill up” relatively lower tax brackets (24% marginal and lower), therefore reducing the taxes they (or their beneficiaries) pay later at a higher tax bracket.
Tax planning is a lifelong opportunity to accumulate and preserve wealth for yourself, your loved ones, and causes you may support. Taking a proactive, holistic approach well before retirement or estate transition, can help maximize the tax code’s provisions. Oftentimes, working with an experienced financial advisor and tax professional can help ensure you're taking advantage of all available strategies throughout your life and across future generations of your family.
Sources: IRS.gov
The information in this material is not intended as tax or legal advice. Seven Springs Wealth Group does not provide tax or legal advice. Consult with your tax professional before making any changes to your accounts. All investing involves risk, including the possible loss of principal. Nothing contained herein should be construed as individualized advice and is for informational purposes only. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client's investment portfolio. Past performance is no guarantee of future performance. Seven Springs Wealth Group is an investment adviser registered with the US Securities and Exchange Commission (SEC). Registration does not imply any level of skill or training. For a complete discussion of Seven Spring Wealth Group’s services and fees, you should carefully review the firm’s disclosure brochure available at www.adviserinfo.sec.gov