Your Financial Future: Plan now for next tax season
Most people are probably feeling relieved that tax preparation season is over. It can be a very stressful time of the year. This year the average refund was smaller than last. There were no stimulus checks in 2022 and the child credit returned to pre-pandemic levels. While you do not want to owe a big balance, it may not be best to get a huge refund. This would only happen if you paid in a lot more during the year than you would end up owing. The government does not pay you interest on this overpayment and you do not have access to this money if you would need it.
Many people approach income taxes from a reactive view instead of being proactive. People who do not have an active tax plan are likely paying more taxes than necessary. They collect all of the documents and take them to their preparer or do it themselves. These people made decisions during the year without considering tax consequences. Maybe, they took money out of an IRA and had to pay a 10% penalty since they were under 59 陆. Possibly a 401(k) match was not accepted. When spending qualified money, there will be taxes due.
Proactive taxpayers take advantage of opportunities that they are allowed. Sometimes they reduce the current year蘑菇视频 taxes by doing things such as contributing to a qualified account like an IRA. This allows them to reduce this year蘑菇视频 income and earn deferred earnings for retirement. Today, people are more responsible than ever for their own financial future.
Sometimes, people take steps that may increase this year蘑菇视频 taxes, to save more in the future. One example of this might be doing a Roth conversion. This is when you take money out of a current qualified account such as a 401(k) and pay the taxes now. The money can then be in a Roth account where you do not have to pay future taxes on the growth if you follow the rules. They are pretty simple. You must be at least 59 陆 and you must have had a Roth for at least five years.
There are a number reasons this conversion might make sense. If you believe that tax rates will go up in the future, why not pay now at a lower rate? Roth IRAs are not subject to required minimum distributions, which could cause Medicare rates to be higher if not converted. A Roth also gives you more flexibility in future income planning and can help reduce the 鈥渨idow蘑菇视频 penalty鈥� upon the death of one spouse. This may also save taxes for your heirs who may be in a higher income tax bracket.
While it is very important to save for the future while you are working, it is best to do so in a balanced way. Too many people have all of their savings in qualified or pretax funds. When Uncle Sam is your partner, he gets to decide when and how much of your money he will take.
Instead, balance your type of saving by using a blend of qualified, non-qualified and special taxed accounts such as Roth accounts. This will give you more options when planning your income source. Remember, not all money is taxed the same.
To save money on next year蘑菇视频 tax bill you must be proactive and make good choices now. Remember, it is not how much you make that is important; it蘑菇视频 how much you get to keep.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥�
If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.