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While Others Debate New Tax Law, Stay Focused on Your Own Plan

The recent tax law changes may be out of your control, but you still have quite a bit of power over your own tax destiny using tried-and-true tax strategies.

The tax overhaul is a hot topic these days, and investors should stay aware of any changes that could eventually affect their retirement plans.

3. Find out if you’re eligible for a health savings account.

Contributions to an HSA are tax-deductible. (If your contributions are deducted from your paycheck, they’re considered pretax.) The money is also tax-free coming out, as long as you use it to pay for qualified health care expenses. It’s the best of both worlds. In 2018, the contribution limits are $3,450 for individuals and $6,900 of you have family coverage. You can also put in an extra $1,000 if you’re 55 or older.

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To qualify, you must be covered under a high-deductible health plan, although be aware that not all high-deductible plans qualify, so it’s best to ask the insurer itself whether your plan is HSA-eligible.

4. Be aware of how Social Security income is taxed, and manage your tax bracket accordingly.

Your Social Security benefits can be taxed when your combined income exceeds the designated threshold ($25,000 for single retirees or $32,000 for couples filing jointly). It’s important to understand that all income is counted, including tax-exempt interest from state and municipal bonds.

The ultimate goal in retirement is to have the income you need and want without taxes eating up your nest egg. And a great way to do that is to keep your money in different “tax buckets.”

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  • The taxable bucket includes everything you’ll pay taxes on every year, including your brokerage and bank accounts, certificates of deposit, interest on bonds, etc.
  • The tax-deferred bucket holds your 401(k) and/or IRA. You don’t pay taxes when you put money in or while that money is growing. But eventually you’ll have to pay taxes on 100% of everything that’s in this bucket, which could push you into a higher tax bracket in retirement.
  • The tax-free bucket is for Roth IRAs and Roth 401(k)s, along with specially designed life insurance policies and municipal bonds. (But remember, the interest on municipal bonds can make your Social Security benefits taxable. See No. 4 above.)
  • Your tax obligation doesn’t stop when you die, so if you plan to leave a legacy for your loved ones, the estate- and income tax-free bucket is important. If a big part of what you leave behind is in a tax-deferred retirement account, Uncle Sam will still want his share. By using life insurance and other estate- and income tax-free vehicles, you can either avoid the tax or pay pennies on the dollar.
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I’m always bewildered when prospective clients come in with what they think is a comprehensive retirement plan, and it doesn’t include any tax strategies. The financial industry puts such an emphasis on investing — with financial professionals often bragging about returns and their ability to earn more than the next guy — that pre-retirees and retirees tend to ignore the impact taxes can have on their bottom line.

What’s the point of earning an extra 1% if you end up giving it all — and more — back in taxes?

While the nation’s pundits and policymakers debate the pros and cons of the Trump administration’s new tax law, why not turn your attention to what you can control? Talk to your tax professional and your financial adviser about building a solid plan that will help you hold on to more of your money in retirement.

Kim Franke-Folstad contributed to this article.

About the Author

Michael Neuenschwander, CFP, CPA

Partner, Outlook Wealth Advisors LLC

Michael Neuenschwander, CPA, CFP®, teams with his father, Allen Neuenschwander, CPA, CFP®, at their financial planning firm, Outlook Wealth Advisors LLC in Texas. Michael is an Investment Adviser Representative and a licensed insurance professional.

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