A decade ago, I made a significant career change from being a concert promoter to becoming a personal finance journalist specializing in tax strategy. In my earlier days, my thoughts on taxes were limited to once-a-year considerations during tax filing season. However, my current role at CNBC has expanded my focus, prompting me to delve into tax planning throughout the year. With the unique perspective of holding a certified financial planner designation, I have come to understand that tax planning is not a one-time event but a continuous process with long-term implications. As Ashton Lawrence, CFP and director at Mariner Wealth Advisors, aptly put it, certain tax moves are interconnected, likened to squeezing a balloon at one end and inflating it elsewhere.
One of the key dilemmas faced by investors is whether to funnel funds into pretax or after-tax Roth accounts. Pretax contributions offer immediate tax benefits by reducing adjusted gross income, but withdrawals in retirement are subject to regular income tax. On the other hand, Roth contributions do not provide upfront tax breaks, but the accumulated funds grow tax-free over time. Generally, higher earners tend to benefit more from pretax contributions, while individuals in lower tax brackets may find after-tax savings more advantageous. However, other factors such as employer matching, investment options, fees, and future legacy goals play a crucial role in determining the optimal account type for each individual.
In the early stages of my career, I gravitated towards Roth savings, aligning with my lower income and distant retirement horizon. Nevertheless, the unpredictability of future tax brackets prompted me to adopt a diversified approach to tax planning across my investment portfolio. Prioritizing my employer’s matching contributions, I spread my deferrals between pretax and Roth 401(k) accounts while also making contributions to a Roth IRA. Additionally, I directed surplus funds into a taxable brokerage account, accepting annual capital gains tax obligations in exchange for the flexibility of accessing the funds before retirement. A small portion of my savings resides in a health savings account, accumulated during my self-employment years, with the intention of making tax-free withdrawals for medical expenses during retirement.
The overarching goal of my tax planning strategy is to achieve flexibility by maintaining a mix of tax-deferred, tax-free, and taxable savings accounts. This diversified approach ensures that I have various sources of funds to draw from based on my annual tax circumstances. As JoAnn May, a CFP and certified public accountant, emphasized, having a variety of account types is advantageous for managing different asset classes effectively. While the location of assets within your portfolio can impact tax liabilities, investment decisions should not be driven solely by tax considerations. It is essential to create a well-rounded investment portfolio that aligns with your financial goals, risk tolerance, and time horizon.
Looking Towards a Tax-Efficient Future
Optimizing tax efficiency in your investment portfolio requires thoughtful planning and periodic reassessment. By diversifying your accounts across pretax, after-tax, and taxable options, you can position yourself for greater financial flexibility and strategic tax management. As you navigate the complexities of tax planning, remember to prioritize your long-term financial objectives while leveraging the benefits of different account structures to minimize tax burdens and maximize investment returns. Join us at CNBC’s upcoming event to gain insights from top financial experts as you build a resilient financial foundation for the years ahead.
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