The deadline for tax filing is around the corner. Besides meeting all the requirements for this date, have you considered the impact of implementing long-term tax strategies on your wealth? Taking steps now can set you up for financial success and security. So take advantage of the opportunity to optimize your tax planning and maximize your financial growth potential. 

Reducing tax bills allows you to save more, grow wealth faster, and achieve your financial goals sooner. Of course, we all roll our eyes at tax filing, but who doesn’t find getting money back exciting? There is one opportunity left to lower your tax bill this year. 

Long-Term Strategies

It’s time to seize several tax planning opportunities that can significantly impact your financial future. The good news is that you have the flexibility to choose the right time to take advantage of these opportunities. Retirement saving and charitable giving are both directly tied to lowering taxes. Here’s how: 

Retirement Saving

Retirement saving tax strategies significantly impact how you grow your wealth. Saving in designated retirement accounts, including traditional and Roth IRAs, 401(k)s, and 403(b) accounts, can provide tax savings now or in retirement, depending on whether you choose a pre-tax or an after-tax retirement saving account.  

Traditional Pre-Tax or Roth After-Tax Saving?

Which is best for you, traditional pre-tax or Roth after-tax saving, is a question most easily answered with the help of a financial planner who can evaluate your lifetime tax rates. While I often advocate for a mix of traditional and Roth savings, emphasizing one or the other (depending on a client’s circumstance), working with a financial planner to know what is best for your unique situation is extremely valuable. This is a tedious process with many factors to consider, and you don’t have to do it alone.

You can convert funds saved on a pre-tax basis to an after-tax basis via a Roth conversion by paying income tax on the converted amount. Those funds converted will now grow tax-free and are not subject to RMDs. A low taxable income year is an ideal time to consider this strategy, whether due to low work income, recent retirement, or large itemized tax deductions. Another opportunity to use the Roth conversion strategy is when you have room before hitting the next tax bracket. Converting an amount to the top of your current tax bracket may make sense. In both instances, assets grow tax-free, and future taxable RMDs are reduced or eliminated.

You should also consider your market outlook when timing contributions. For example, many people make equal contributions to their 401(k)s and wait until year-end to make IRA contributions.  But if you have a positive market outlook and have the funds available now, investing in your IRA now, front-loading your 401(k) early in the year, or doing Roth conversions early in the year allows the growth to happen in these tax-advantaged accounts.

Different Strategies Meet Different Goals

Tailoring your approach based on specific objectives can be instrumental in devising a customized plan, as various strategies fulfill different goals.

To reduce current taxes, a good strategy is saving via a traditional IRA or 401(k). Doing so allows you to contribute pre-tax dollars and reduce your tax bill. For 2023 you can save up to $20,500 to your company’s traditional 401(k) and $27,000 if you are over 50. Assets grow tax-deferred. 

To avoid paying taxes on the growth of your retirement saving and retirement account withdrawals, consider choosing a Roth IRA or 401(k). You pay taxes now on what you contribute to a Roth account, meaning you currently have less cash flow. However, the assets in Roth accounts grow tax-free. In addition, withdrawals are tax-free any time after reaching age 59 ½ and are not subject to RMDs providing additional flexibility (in retirement, the IRS requires you to take Required Minimum Distributions [RMDs] from your traditional IRA and 401(k), which are taxed as income, but in there is an exemption in this case).

Gifting and Giving

Beyond retirement saving strategies, gifting and giving also open doors to reduce your tax burden. From contributing to your children’s 529 plans to making donations with a cause, here are some tax strategies you might’ve been curious about:

529 Education Savings Plans

Giving to your children via 529 education savings plans allows funds to grow tax-free if withdrawn to pay for qualified education expenses. Depending on your state, you can also enjoy state tax benefits for contributing to a 529 plan. In addition, Secure Act 2.0, which passed in late 2022, allows 529 funds up to $35,000 to be converted to a Roth IRA for that individual if the account has been open for at least 15 years. So opening a 529 account now, even with a small amount, will start that clock ticking.

Qualified Charitable Distributions or QCDs 

QCDs allow those currently taking RMDs to give directly to a 501(c)(3) charity from their IRA up to the limit of $100,000. This reduces taxable RMD income dollar for dollar.

Donating Appreciated Stock 

Donating appreciated stock directly to a charity allows you to contribute more to your favorite organization.  A direct stock donation to your chosen 501(c)(3) charity is valued at market value on the date of transfer for tax purposes.  It avoids the capital gains tax you would otherwise pay if you sold the stock and donated the proceeds.  Many charities accept stock donations as it is a win-win for both charity and donor.

Donor Advised Funds (DAFs)

Increasing your giving in a single year by “bunching” donations or utilizing donor-advised funds (DAFs) allows you to itemize your deductions. Strategically plan to bunch your donations into one year, possibly by making what you consider last year’s and this year’s donations simultaneously to push you over the standard deduction threshold. Also, consider funding a Donor Advised Fund, which allows you to take the donation tax write-off in one year but distribute the funds over time to the chosen charities. This is a beneficial technique when receiving a large one-time bonus.

Timing of Strategies

Timing is a critical factor to consider when developing tax strategies, as it can significantly impact the amount of tax you owe and the effectiveness of your tax planning. Therefore, tax strategies should be considered a year-round priority rather than solely during tax-filing season.

Tax Loss Harvesting

Vigilance for harvesting tax losses throughout the year (rather than waiting until year-end) provides additional tax savings. Selling security at a loss provides a capital loss tax deduction that can match against capital gains from other investments or be taken as a tax deduction of up to $3,000 per year from your tax return. People often focus on harvesting tax losses at year-end.  But March 2020, when the S&P fell significantly but later rebounded, demonstrated that taking advantage of these opportunities throughout the year is even more beneficial.  A financial advisor by your side monitoring these opportunities is a great resource.  

Those That Start Early Get a Head Start

Gifting assets earlier in the year moves the asset growth out of your estate earlier and provides the recipient with that growth sooner for the benefit of both. In addition, an individual can gift up to $17,000 per year per recipient without triggering gift taxes.  

While paying taxes is a part of life, taking advantage of these opportunities can help you minimize your tax bill and growth your wealth.  Working with a trusted financial advisor who understands your unique circumstances will help you maximize these opportunities.

The Bottom Line

Implementing long-term tax strategies can be a game-changer in growing your wealth. By taking advantage of the various tax-saving opportunities available, you can reduce your tax burden, free up cash flow, and optimize your financial growth potential. From contributing to retirement accounts to taking advantage of deductions and credits, and making charitable contributions, there are several ways to minimize your tax liability and maximize your financial success. With careful planning and execution, you can secure your financial future and achieve your long-term goals.