You just finished your taxes, but it's not too early to make plans for next year.
It's important that as you build your plan, you think about some strategies to reduce or defer your taxes now or in the future. Here are some strategies to consider helping your financial plan become more tax-efficient:
1. Tax harvesting
Usually, this strategy is implemented near the end of the calendar year, but it can be done at any time. With tax-loss harvesting, you sell off holdings that have a loss position to offset the gains you've experienced from other sales.
The asset you sold is then replaced with a similar investment to maintain the portfolio's asset allocation and expected risk and return levels. It won't restore your losses, but it can ease the pain.
2. Using long-term gains and the 0% tax rate
For those who fall within the 15% tax bracket, your long-term gains are tax-free. Make it a habit to project your taxes and to look for tax opportunities every year as part of your plan.
3. Making IRA contributions
You have until the upcoming April’s Tax Day to make a Roth or traditional IRA contribution for that tax year, but why put it off? In fact, you could even use your income tax refund to fund it. Remember, a Roth creates tax-free income in the future, which is worth its weight in gold.
4. Using the "backdoor" Roth
Some people make too much money to contribute to a Roth IRA or to take a deduction on a traditional IRA. But you still can make a contribution to a traditional IRA without the deduction and later convert it to a Roth.
There's no tax due, except on growth in the account that you earn between the time of the contribution and the conversion. If you hold money in a traditional IRA for a short time only, the growth – and the resulting tax – should be small.
5. Exploring financial vehicles that can defer taxes on dividends, interest and capital gains
Tax deferral allows you to employ the triple compounding effect: It pays interest on the principle, interest on the interest and interest on the taxes that you would have paid if you were in an investment that was taxed annually.
This year – or any year for that matter – don't wait until the end of the year to think about the moves that could save you on your tax return.
Get together with your financial adviser or tax professional now to discuss a plan that will help you succeed in your goals.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMeX is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.