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Tom Limoges

December 07 , 2015

4 Helpful Retirement and Tax Planning Strategies

Taxes, while often overlooked, are an important consideration when planning for your retirement.   Over the past few weeks, I have been working with clients on investment strategies to reduce tax bills and I thought I would share a few ideas with you to consider and discuss with your tax professional.


Tax Loss Harvesting  

One way to maximize your after tax return on your portfolio is through tax loss harvesting. Tax loss harvesting involves selling investment assets with losses to offset investment gains to reduce your total tax bill. This strategy works well in a year such as 2015 when energy stocks and emerging markets likely experienced losses. One important rule to consider is the Wash-Sale rule from the IRS. If the same or substantially identical asset is purchased within 30 days, the loss will be disallowed by the IRS.


Backdoor Roth IRA

The Backdoor Roth IRA is a way to contribute to a Roth IRA when your income exceeds the IRS contribution limit. In this situation, an investor can contribute to a non-deductible Traditional IRA and convert those dollars to Roth IRA. If you have no other traditional IRAs, your tax bill for the conversion is zero because you did not deduct your contribution. Traditional to Roth IRA conversions are also another tax planning strategy to consider.


Asset Positioning/Placement        

The positioning of assets in investment/retirement accounts can have an impact on taxes. Generally, assets that generate high growth and capital gains should be placed in Roth IRAs. Income producing assets such as government or corporate bonds may be best suited for Traditional IRAs to shield the investor from taxable income. Tax efficient investments held long term; such as tax exempt bonds, common stocks, and low turnover ETFs and passively managed mutual funds could be best used in taxable accounts.    


Health Savings Account Contributions

Contributions to Health Savings Accounts (HSAs) are a great way to lower your tax bill. Starting in 2016, the annual limitation for someone with single coverage under a high deductible health plan is $3,350 and $6,750 for an individual with family coverage. Contributions to HSA accounts are treated similar to IRA contributions by the IRS by lowering income. In addition, contributions made pretax through payroll deferral can lower payroll deferral taxes (7.65%) for both employee and employer. HSA checking accounts can also be rolled into investment accounts that can hold stocks, bonds, mutual funds, and ETFs to provide growth. In addition, HSA withdrawals that are used to pay for qualified medical expenses and in some cases, long term care insurance are treated as tax free distributions. Tax reducing contributions, as wells as tax free growth and withdrawals, if used for qualifying expenses, make this a great tax saving strategy.


The above are a few of my favorite strategies to implement as a way to reduce your tax bill. If you have any questions about these strategies, please contact one of our knowledgeable wealth management advisors. In addition, it’s always a good idea to consult with your tax advisor on any changes that can affect your tax situation.

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