Lifepoint Financial Design – LifePoint Financial Services – Mike Metzger Financial Planning

With the election behind us, it’s time to start thinking about the proposed tax law changes. With most of the proposed tax plan laid out in front of us, there are some crucial financial strategies that high income earners will want to consider to ease any tax burdens.

For most, tax laws are a foreign language. Without any clarification, it can get overwhelming causing you to put it off and do nothing. But making timely adjustments in your financial strategy is vitally important to your family’s future financial health.

As a CERTIFIED FINANCIAL PLANNER™ in Salt Lake City and working with clients across the country, I’m here to help guide your financial plan with 6 crucial strategies to consider for the coming year.

1. Take Strategic Deductions

With the increased standard deduction under the Tax Cuts and Jobs Acts likely going away, it’s a good idea to start being strategic about the timing of large deductions. In years where you know you may be receiving a bonus, higher commission, or vested stock options; you want to think about lumping and accelerating expenses into those years and utilize itemized deductions. For example, taxpayers may want to consider making one large charitable gift, as opposed to making the annual charitable gift allowance.

2. Invest In Municipal Bonds

It’s thought that state agencies will receive much more support and fiscal backing under a Biden-led government. This may lead to increased security in state-issued municipal bonds. Municipal bonds are still very attractive for those with high income. With the addition of a 3.8% surtax on net investment income, municipal bonds can add significant benefit when it comes to your overall tax situation.

3. Consider Roth IRA or Roth 401(k) Conversions

When you are in a lower income tax year, think about converting some retirement money into a Roth IRA or converting to your employer-sponsored Roth 401(k) for a future source of tax-free income. Your taxes will likely be increasing after 2021, so this might be an especially good year to make a conversion. Likewise, during years of lower income tax-brackets similar to current tax law, consider the opportunity to covert some retirement money into Roth savings. It may be wise to do this incrementally over a period of years.

4. Use of Life Insurance

Cash value building life insurance policies allow for tax deferral of growth. Those dollars can be invested in policies like an indexed universal life policy or a variable universal life policy. Tax law still allows for future borrowing against the policy to help fund retirement goals and can be a very valuable tool. With tax rates increasing for higher income individuals and families, this would be a way to provide income without taxation.

5. Donor Advised Funds

Donor Advised Funds (DAF) are investment accounts specified for the purpose of charitable giving. DAF funding allows you to take immediate deductions for contributions even though those funds may not have been granted to the charitable organization that you chose. An additional benefit comes with capital gains avoidance, as those funds belong to that charitable sponsor. Consider gifting to a DAF in increased income earning years or in a year with an unexpected financial windfall. Donor Advised Funds also allow for gifting of highly appreciated securities assets which would be valued at current market value, avoiding capital gains tax.

6. After-Tax 401(k) Contributions

Some retirement plans have provisions that allow for after-tax contributions into the plan. These are not Roth contributions, but contributions of after-tax cash. If allowed, you could potentially maximize your 401(k) contributions up to the allowed amount of $57,000. In addition, if your 401(k) provisions allow, you could roll out those after-tax contributions into a Roth IRA to allow the gains on those contributions to grow tax-free going forward.

In a year of tax law change, you want to make sure you are taking advantage of strategic financial strategies. Those saved tax dollars over the course of 10-20 years can make a huge difference for future needed years.

If you are in need of additional strategic help, download my FREE eBook below


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply.

Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

Municipal bond are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federal tax-free but may be subject to state and local income taxes. If sold prior to maturity capital gains tax may apply.

Scroll to Top