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Bradford Financial Center, a national wealth management company, delivers a financial advisor's simple approach to making small changes that can result in big results for your financial future. From budgeting, tax planning, and saving for retirement to college planning, smarter insurance solutions, and building wealth, the practical advice is easy to apply for investors at any level.
All episodes include a "Five in Five" segment where we break down quick-hit financial trends for their listeners.
00:03.5 Intro: Welcome to your Wealth Journey podcast powered by Bradford Financial Center, where we'll always share how small changes equal big results because your wealth journey is our focus.
0:00:14.5 Shallon Weis: Hello everyone. This is Shallon Weis and Jim Tausz, financial planners for Bradford Financial Center. Today we'll cover the wealth journey topic of tax planning and tax saving. Taxes are always a topic that's in season because our financial moves all year long impact our taxes. So let's dive in to discuss the financial strategies for saving on your tax bill come April. Jim, we get a lot of questions from clients about who to talk to about their taxes. Wouldn't you agree that there is some confusion among clients and investors that your financial planner or advisor isn't the source for tax talk?
0:00:48.9 Jim Tausz: Well, it's true and it's a myth that Bradford has worked to dispel over the past 50 plus years of history of the Bradford itself. Financial advisor is critical resource in your tax planning. And here's why. Who knows your financial situation? Just think about this. Who knows your financial situation, your financial goals, your roadway to achieving those goals that you do have? Better than your financial advisor, there is nobody more qualified. These are the folks that you trust to get to the finish line so that the best resources also is there to help you find all the best tax saving money moves for every part of your journey. And believe me, this is a long journey. But let's start at the beginning of the tax planning process. As you're working to build wealth, there's some basic fundamental things that you can do to put yourself on the right track to a smart tax savings plan. While these might seem elemental to you, however, they are very big building blocks and some younger investors and I mean those in the critical ages of their 20s and 30s, simply, they overlook these things. For example, the Roth IRA. We have to think of a long term strategy here. You expect that as you age that you're going to be accumulating wealth that is eventually going to drive you into a higher marginal tax bracket later in life.
0:02:11.8 JT: Well, this is true for most of our clients, that is, the strategy allows younger investors to contribute to their predetermined earnings. And then when they are earning less in a lower tax bracket into the IRA, that will pay later in life tax free benefits. So pay the taxes upfront and it earns overtime tax free. So contributions to a Roth IRA are really subject to income limitations. And you must know that your financial planner can help you with that. You may take non taxable withdrawals, for example, from a Roth IRA if you're at least 59 and a half. An account has been held for at least five years is also another important factor in that calculation. Otherwise, the earnings withdrawal may be subject to not only ordinary income tax, but as a tax penalty of 10% as well.
0:03:03.8 SW: I love this strategy, but the good news is that even later in your earning years, you can still do the Roth IRA conversion to move pre-tax money held in a traditional IRA or 401k into an after tax Roth IRA. Obviously, you'll pay income taxes on the converted funds, but future qualified withdrawals from the Roth IRA are tax free.
0:03:23.9 JT: That's right, and even later in life when you're 72 or older, the subject is required minimum distribution happens to rear its ugly head. They call them RMDs, where the taxable withdrawals must be taken at least from a traditional IRA and I might add 401ks as well. These Roth IRAs are not subject to RMDs, so ideally you can leave those in your account for distribution to those heirs as part of your estate planning efforts as well. The area that we caution our investors looking to reduce tax liabilities are these. Roths can increase your adjusted growth of income for the year that you convert. And those years when you're Medicare eligible, the increase in income could also increase your Medicare premiums too. And how much of your social security income gets taxed is a big factor as well. So, it's always good to flush out the entire model with your financial advisor to see all the pros and the cons that you should weigh when you're making these plans. Then there's the HSA account. Frankly, this is God's gift, the tax-free savings. That's so often misunderstood, and so people should talk to their financial advisors about these as well.
0:04:43.1 SW: Totally agree. This is the best-kept secret US investors need to be aware of. Health savings accounts are available as a part of your health insurance plan, but you have to look for it and be sure that your plan includes it. Typically, they are part of a high-deductible plan. And what's cool about these is that as part of an employer-sponsored plan, you can contribute up to X amount a year into this HSA plan, tax-free. But the best part is not spending this money. This is where the value stands out. Traditionally, folks might use this money in the HSA to pay for the remainder of their doctor bill or dentist bill after the insurance is paid, so basically your copay amount. And that's fine if you need to, but the benefit is much greater when you don't use it and let it accumulate. Holding that money in that account allows it to earn like a mutual fund and grow tax-free over time. So now when you retire, you can use that money to fund your health insurance premiums until you qualify for Medicare, or even use it as your own account to draw from if you need long-term care. So it goes in tax-free, it earns tax-free and it comes out tax-free. Jim, it's the only method I see right now where all three of those things are available.
0:05:49.8 JT: Well, that's where I come in and say, yes, let's do it now. But we've got to be smart enough to include it as part of our tax savings plan as well. HSAs, withdrawals, are non-qualifying expenses prior to age 65, and it will be subject to income tax. And I might add a 20% penalty. Shallon, let's take a deep dive and take a look at the buy and hold investing next.
0:06:14.6 SW: Good point. Buy and hold investing is investing in stocks you intend to hold for the longer haul.
0:06:20.2 JT: What makes this strategy a good tax move is that you're not in a constant state of accumulating capital gains every time that you sell. Holding, in theory, allows you to have the gains that are unrealized as long as you're investing in stocks that don't pay any dividends or pay very little dividends.
0:06:38.5 SW: So we refer to that as a tax deferral until you sell. And then you'll incur taxes on your capital gains, which is likely a lot lower long-term capital gains rate. And what about qualified charitable distributions? These could be a great way to fund your favorite charity through a qualified charitable distribution because it is directly transferred between your IRA to a qualified charity.
0:07:01.4 JT: I'm glad you mentioned that, Shallon. Yes, those are very smart. Also known as IRA charitable rollover distributions, they're also considered to be part of a required minimum distribution, which is normally taxed as well. We help clients map those out on an annual basis so that they can experience tax savings year over year. We have helped clients when they want to sell their highly appreciated assets, like for example, businesses or perhaps farmland. There are strategies that we can explore such as installment sales, trusts, building and restructuring that can help negate taxes. We help our clients make the best decisions based on their goals and their personal situation. To use your RMD to donate to a charity, you have to be really cautioned about that. If you plan to offset your RMD with a qualified charitable distribution, the transaction must be done in conjunction with one another. So you got to make a plan here, in other words, you got to know what you're doing. You cannot take an RMD and retroactively use these dollars to make a qualified distribution.
0:08:01.8 JT: That would run afoul of what they call the rule of first dollars in, first dollars out, which states that the first dollars taken from your IRA will actually satisfy required RMDs requirements. Now it's also important to note the tax law is ever evolving year after year. So the Bradford Financial Center advisory team will work closely with our Bradford tax and accounting arm to understand the laws that are changing and also the new laws coming into effect that impact our clients' financial plans. One thing can be guaranteed, it's ever changing. Our goal is to prepare a long-term model for our clients so that they can take advantage of these tax strategies decade after decade after decade, but you have to stay up with it to do it.
0:08:48.5 Speaker 4: In our last five minutes, we'll bring listeners a roundup of five smart ideas they can apply to their own wealth journeys. So let's get started with this episode's Five in Five.
0:08:57.7 SW: Hey there folks, welcome back to our Five in Five segment. Jim, are you ready to dive into some tax saving tips and have some fun along the way?
0:09:06.8 JT: You know me, Shallon. I'm always ready. Absolutely. Taxes might not sound like the most exciting topic, but trust us folks, we're going to make it really kind of light, pretty funny, and also easy to understand. You'll be like, you can hardly believe we're so funny, actually. So if you want a big laugh, you got to come see us. So anyway, grab a cup of coffee, sit back and let's start saving some of those serious dough that we want to keep in our own pocket and not give to somebody else like the government. Alright, let's kick things off with our first tip. Tip number one, befriend the magical world deductions. I love deductions. You know, Shallon, deductions are like a hidden treasure just waiting to be discovered. They're like gold nuggets when it comes to your tax return and saving money.
0:09:52.7 SW: Oh, I really love a good treasure hunt, Jim. Now folks, think about those expenses that you can deduct from your taxable income, like charitable donations, mortgage interest and even some medical expenses. It's like finding gold in your tax return.
0:10:05.1 JT: That's right, Shallon. And speaking of treasure, here's a tip number two, embrace the power of retirement accounts. Not only do they help you save for the future, but they can also give you some of the sweetest tax breaks along the way that you've ever seen in your life.
0:10:18.9 SW: Sweet tax breaks, count me in, Jim.
0:10:21.9 JT: Yeah, I love that too.
0:10:24.2 SW: Retirement accounts like 401ks and IRAs, they can really provide you with tax-deferred growth, which means you don't pay taxes until you withdraw the money. It's like getting a discount coupon for your taxes. And here's a little bonus tip within a tip. If your employer offers a 401k match, make sure that you contribute enough to get the full match. It's like getting free money and who doesn't love that?
0:10:44.0 JT: Now, let's move on to tip number three, the wonderful world of tax credits. They're like the superheroes of the tax world. Believe me, it's one of the best tax breaks you could ever find or ever have. Tax credits can directly reduce your tax bills and who doesn't love paying fewer taxes, because look, one of our biggest expenses, without a doubt, is taxes, so we got to save. This is a good place to start that. There are credits for things like education expenses, adopting a child and even energy-efficient homes, and also home improvements of various kinds. It's like getting a rebate for being an awesome person and so you deserve to keep all this money, so be awesome.
0:11:26.0 SW: I agree, and getting a rebate for things you normally do is a huge benefit. And our fourth tip is all about the power of timing. You see, folks, sometimes it's better to shift income or expenses between years to optimize your tax situation. For example, if you expect your income to be higher in one year, it might be beneficial to delay some income or accelerate deductions to lower your taxable income. It's like playing a strategic game of chess with your taxes.
0:11:53.7 JT: And you know what? Nobody likes to play chess more than I do, 'cause I love to make, be able to keep everything I can at home because I know that's how you can get rich. So I'd say to you, Shallon, checkmate. And now for our final tip. Staying informed and seeking professional help. Taxes can actually be very tricky, folks, so don't be afraid to ask for help from qualified financial advisors out there. Especially the Bradford Financial Center, because we have tax professionals on our team who can add that extra layer of insight to your financial journey. And believe me, you bring the right team together, you're going to have a wonderful journey.
0:12:29.7 SW: Absolutely, Jim. And a good tax professional can help you navigate the ever-changing tax landscape and find even more ways to save money. It's like having a tax-saving superhero by your side.
0:12:42.1 Outro: Thank you for tuning in to your Wealth Journey podcast powered by Bradford Financial Center. Be sure to tune in to our next episode where we'll continue to explore the smart financial strategies you need to know.
Securities are offered through United Planners Financial Services. Member FINRA. Member SIPC. Advisory services are offered through Bradford Financial Center, a registered investment advisor. Insurance services are offered through Bradford Insurance. Tax and accounting services are offered through Bradford Tax and Accounting Network. Bradford Financial Center, Bradford Insurance and Bradford Tax and Accounting Network are not affiliated with United Planners. Neither Bradford Financial Center nor United Planners provide tax or legal advice.
This podcast is for general information and educational purposes only and is not intended to be specific advice for any individual. Consult your financial professional regarding your personal situation. All investing involves risk and there's no guarantee that any strategy will be successful.