It might seem like it’s a little early to reduce your 2017 taxes, but we think it’s never too early to start thinking ahead. The best choice is to meet with a tax advisor to make sure you are making the right choices, but we have some things to share with you for you to consider before it’s time to file your taxes again. If you have any questions, reach out to a financial advisor at Kennedy Financial & Insurance Services Inc. today!
You can actually shelter your interest inside your retirement accounts. Any investment portfolios that contain bonds would be best inside tax-deferred retirement plans, including IRAs and 401(k) plans. Many bonds will pay interest that is taxed at normal income rates, but when these bonds are inside a retirement plan account, they could avoid current taxation. Of course, keep in mind that tax-free municipal bonds could be an exception. They can pay federal and sometimes state tax-free interest. These bonds are suited for taxable accounts but not usually retirement accounts.
Look at Your Taxable Account Investments
Using tax-efficient mutual funds or accounts that are managed separately could limit the number of taxable items in your portfolio. Buy-and-hold strategies can be a good option for some investors when we consider combined federal and state capital gains rates going over 30 percent.
Use Cash Flow to Balance
Selling your current investments should only be a final effort to balance out your portfolio because you can be taxed on any gains you make. However, you can consider using cash flows to rebalance your portfolio. The dividends and interest earned in the account and any new deposits can be used. Plus, it can help lower your transaction costs!
Know Your Tax Losses
If you know an investment is a loss, consider selling it. You can actually get a tax deduction! You are allowed to realize your net investment losses up to $3,000, a sum that can be used to decrease your taxable income or at least offset some of the gains you’ve made this year. When you sell at a loss, however, there are certain rules about how you are allowed to reinvest those proceeds. Make sure to closely take a look at these rules. They say that you can’t reinvest these proceeds in an investment that is too similar for a 30-day window before or after the sale. If you choose to ignore those rules, you might not be able to take advantage of the tax loss.
Contribute to Your Roth IRA or IRA
You can contribute several thousand dollars to your IRA account that goes tax-free. Anyone under 50 can contribute $5,500, while anyone over 50 can add $6,500. These are the maximum contributions that will receive no tax penalties. Keep in mind that this contribution maximum counts for all of your IRAs combined, so putting in more than the max cumulatively won’t help. Also, there may be some income limits in regards to your ability to contribute. You will want to speak to a tax advisor before making any IRA contribution decisions.
Consider Roth IRA Conversion
This could actually lead to longer-term tax benefits. There are some limitations on income that can keep investors from contributing to their Roth IRA, but people with assets in an employer’s retirement plan or normal IRA can complete a Roth conversion without any income limits. You will be able to move certain funds from your employer retirement plan into a Roth IRA; when this happens, you create a “taxable event,” meaning you will need to pay taxes on the amount converted as your ordinary income. If you are younger and choose to invest, you have a longer period of time to grow your Roth IRA and cover the taxes you paid at conversion, which means that younger investors have more to gain.
You can save quite a bit on your taxes if you If you are ready to learn more about financial, tax, and retirement planning, it’s time to contact Kennedy Financial & Insurance Services Inc. We are here to help you make the best financial investments and decisions for your future. Reach out to us today to get started.