{"id":4284,"date":"2020-05-27T06:00:21","date_gmt":"2020-05-27T13:00:21","guid":{"rendered":"http:\/\/springwaterwealth.com\/?p=4284"},"modified":"2020-05-20T13:08:56","modified_gmt":"2020-05-20T20:08:56","slug":"the-importance-of-incorporating-tax-planning-into-your-financial-plan","status":"publish","type":"post","link":"https:\/\/springwaterwealth.com\/the-importance-of-incorporating-tax-planning-into-your-financial-plan\/","title":{"rendered":"The Importance of Incorporating Tax Planning Into Your Financial Plan"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">If you imagine your life as a journey, then you might think of a financial plan as a roadmap \u2013 or, if you\u2019re a sailor, as a course to plot \u2013 designed to get you from where you are today to where you want to be in the future.<\/span> <span style=\"font-weight: 400;\">During your journey you\u2019ll encounter lots of opportunities, but also some obstacles and challenges. It\u2019s important to incorporate tax planning into your financial plan.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">What a Financial Plan Includes<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">A robust financial plan will address all of the following areas of your financial life:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Cashflow planning<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Risk management and insurance<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Investment management<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Retirement planning<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">College planning<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Estate planning<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">A number of these areas of your financial plan are particularly affected by tax planning.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Tax Planning and Investing<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Asset location is a strategy that\u2019s based on the fact that different types of investments receive different tax treatment. How the income you receive from an investment will be taxed should determine the type of account in which you own it.\u00a0 For example, because stocks generate most of their return from capital appreciation (the price going up), and because capital gains are taxed at lower rates than ordinary income, it\u2019s generally better to own stocks in a taxable account, like a brokerage account.\u00a0 Similarly, because bonds and real estate (REITs) produce regular income, holding them in a tax-deferred account like an IRA or 401(k) allows you to shelter this income from tax until you begin taking distributions.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Tax Planning and Saving for College<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Aside from buying a home, paying for college is one of the biggest expenses most people will face. The fact that the cost of college has been rising faster than the overall rate of inflation for decades has made saving even more important.\u00a0 Fortunately, there\u2019s a tax-smart way to do so.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A 529 plan is an education savings plan that offers important tax benefits.\u00a0 While 529 plans can be used to save for K-12 expenses, too, they\u2019re still primarily used for saving for college.\u00a0 There are two types of 529 plans: college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan.\u00a0 While you can invest in any state\u2019s plan, over 30 states offer their residents a state income tax deduction or a tax credit for investing in their home state\u2019s plan.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">These plans are attractive because they offer tax-free earnings growth and tax-free withdrawals when the funds are used to pay for \u201cqualified education expenses\u201d.\u00a0 For college, this includes tuition, fees, books, supplies, equipment, computers and sometimes room and board.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><span style=\"color: #00bbff;\"><strong><a style=\"color: #00bbff;\" href=\"http:\/\/springwaterwealth.com\/contact-us\/\" target=\"_blank\" rel=\"noopener sponsored noreferrer\">Want to learn more about financial planning? Contact our team at Springwater Wealth today to learn how we can help you develop a plan for your financial future.<\/a><\/strong>\u00a0<\/span><\/h2>\n<p>&nbsp;<\/p>\n<h2><span style=\"font-weight: 400;\">Tax Planning and Retirement<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Depending on your age, retirement can seem either very, very far away, or right around the corner.\u00a0 But regardless of your horizon, tax planning is a crucial part of getting ready for your ideal retirement.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For most Americans, a <a href=\"http:\/\/springwaterwealth.com\/social-security-for-women-what-every-woman-should-know\/\" target=\"_blank\" rel=\"noopener sponsored noreferrer\"><strong><span style=\"color: #00bbff;\">Social Security<\/span><\/strong><\/a> benefit won\u2019t be enough to meet their income needs in retirement.\u00a0 And because defined benefit pensions are now the exception and not the rule, saving for your own retirement is essential.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The American tax code includes benefits to incentivize saving for retirement.\u00a0 To understand these benefits, you need to understand the difference between taxable, tax-deferred and tax-free accounts.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A brokerage, checking or savings account is a taxable account.\u00a0 Simply put, this means that any income generated in the account will be taxed at the appropriate rate in the year it\u2019s earned.\u00a0 Capital gains in a brokerage investment account will be taxed at preferential capital gains rates, while interest income will be taxed at ordinary income rates.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In contrast, Individual Retirement Accounts, SEP IRAs, and 401(k) or 403(b) employer-sponsored retirement plans are tax-deferred accounts.\u00a0 Your contributions to these accounts are made with dollars that haven\u2019t been taxed (i.e. they\u2019re \u201cpre-tax\u201d contributions), and the earnings generated in the accounts aren\u2019t taxed when they\u2019re received.\u00a0 However, when you begin taking distributions, each dollar <a href=\"http:\/\/springwaterwealth.com\/tax-efficient-retirement-withdrawal-strategies\/\" target=\"_blank\" rel=\"noopener sponsored noreferrer\"><span style=\"color: #00bbff;\"><strong>withdrawn<\/strong><\/span><\/a> will be taxed at ordinary income rates.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Finally, there are also Roth retirement accounts \u2013 IRAs, 401(k)s and 403(b)s.\u00a0 Roth accounts don\u2019t provide you with a tax break when you contribute to them \u2013 your contributions are made with \u201cafter-tax\u201d dollars.\u00a0 Your earnings generated in the account aren\u2019t taxed when they\u2019re received.\u00a0 And when you begin taking distributions, your withdrawals are totally tax-free.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Ideally, you\u2019ll accumulate savings in all three of these buckets.\u00a0 That way, when you retire and need income from your portfolio, smart tax planning will allow you to pay the least amount of total tax.\u00a0 For example, in years when your income is low, you can take distributions from your IRA, and pay the required income tax at a lower rate.\u00a0 And in years when your income is high, you can take tax-free distributions from your Roth account.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Tax Planning and Charitable Giving<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The Tax Cuts and Jobs Act of 2017 made several significant changes to the tax code. These changes include a nearly doubled standard deduction, limitations on <a href=\"https:\/\/www.investopedia.com\/articles\/taxes\/08\/itemized-deductions-overview.asp\" target=\"_blank\" rel=\"nofollow noopener noreferrer\"><strong><span style=\"color: #00bbff;\">itemized deductions<\/span><\/strong><\/a>, reduced income tax rates, and reforms to several other provisions. For example, taxpayers are now limited to deducting a total of $10,000 among state and local property, sales, and income taxes paid (known collectively as \u201cSALT\u201d).\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While these changes simplified the tax code for individuals by eliminating the need for millions of households to itemize their deductions, they also impacted charitable giving. This is because by making the standard deduction larger, the value of itemized deductions was lessened. \u00a0It\u2019s now more advantageous for many taxpayers to take the increased standard deduction than to itemize their deductions.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, with some astute tax planning, you can still receive a tax benefit for your charitable giving, even if you typically would take the standard deduction rather than itemize.\u00a0 <\/span><span style=\"font-weight: 400;\">The strategy is to <a href=\"http:\/\/springwaterwealth.com\/bunching-your-deductions\/\" target=\"_blank\" rel=\"noopener sponsored noreferrer\"><strong><span style=\"color: #00bbff;\">combine<\/span><\/strong><\/a>, or \u201cbunch\u201d<\/span><span style=\"font-weight: 400;\">, several years\u2019 worth of giving into a single tax year.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">How does it work?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">First, review your planned giving for this year and the next few years. The goal is to exceed the standard deduction for this year with the combined amount.\u00a0 Then, \u201cbunch\u201d all of the giving together and do it this year.\u00a0 You\u2019ll itemize your deductions for this tax year to reduce your taxable income.\u00a0 For next year, though, and perhaps for a couple of years after that, you won\u2019t make charitable donations, and you\u2019ll just claim the standard deduction when filing your taxes.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">And if you\u2019re really interested in super-charging your charitable giving through bunching your giving, a <\/span><span style=\"color: #00bbff;\"><strong><a style=\"color: #00bbff;\" href=\"http:\/\/springwaterwealth.com\/what-is-a-donor-advised-fund\/\" target=\"_blank\" rel=\"noopener sponsored noreferrer\">donor advised fund<\/a><\/strong><\/span><span style=\"font-weight: 400;\"> may make sense.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you imagine your life as a journey, then you might think of a financial plan as a roadmap \u2013 or, if you\u2019re a sailor, as a course to plot \u2013 designed to get you from where you are today to where you want to be in the future. During your journey you\u2019ll encounter lots [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":4285,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","_mi_skip_tracking":false,"footnotes":""},"categories":[3,6,10],"tags":[13,66,132,140],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/4284"}],"collection":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/comments?post=4284"}],"version-history":[{"count":0,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/4284\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media\/4285"}],"wp:attachment":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media?parent=4284"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/categories?post=4284"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/tags?post=4284"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}