By Maurice Stouse, Branch Manager and Financial Advisor
Many businesses and individuals in the world and America in particular are experiencing and benefiting from (in spite of the increased spread of the virus) a huge growth in the money supply, strong earnings, early retirements and the sales of their businesses. While there is much to acknowledge by the financial security these can bring, it also means considering the impact taxes can have. Add to that Washington has increased spending and increased tax plans on its current agendas.
When it comes to taxes and investing, there are three main strategies individuals might want to consider. Each has its own merits and distinguishes itself from the other. Any one or combination of the three may help address the accumulation of wealth and the preservation of it as well.
The three are: 1) Tax reduction strategies 2) Tax free strategies and 3) Tax deferred strategies.
Tax reduction strategies (for current and future tax liabilities for individuals and perhaps their estates). This involves charitable giving or moving assets out of their estates. Americans are among the most charitable people in the world and they can combine their philanthropy with reducing their current taxes with contributions directly to a charity of their choice (including churches, schools/universities and certain societal causes). Another way that is utilized and is an increasingly popular strategy of Donor Advised Funds (or DAFs). And some, depending on resources they have, might even establish their own private foundation. The impact is that it reduces (within certain limits) income taxes for the current year while also fulfilling their support for the causes they care about. There are also tax reduction strategies that can impact current and future taxes by utilizing things like Charitable Remainder Trusts (CRTs), Charitable Lead Trusts (CLTs). And some may be looking to get assets out of their estates to address the tax burden for their heirs (so no current tax savings for them) and utilize things like Spousal Lifetime Access Trusts (SLATs).
Tax free strategies focus on those investments where income is not taxed federally (and in some states as well). These can help reduce current taxes particularly in a year where income may be surging. The main investments available in this case are municipal bonds or municipal bond funds or exchange traded funds. Many of these are considered more conservative (and hence not growth oriented) investments and pay monthly, quarterly or semi-annual tax-free income. Social security recipients should take note that the income while not taxable does go into their earnings calculations. Lastly, certain retirement accounts like the ROTH IRA, when certain requirements have been met by the holder, might deliver tax free income (post 59 ½ years old and after a certain waiting period for owners or beneficiaries) for life.
Tax Deferred Strategies. Many Americans do this at every paycheck by contributions to their 401ks, 403bs, SIMPLE (Savings and Incentive Match Plan for Employees) plans or SEP plans. These contributions not only reduce your current taxable income but they also can grow on a tax deferred basis (without annual taxes on growth, capital gains or any income they produce). In theory that means the investments have an advantage to taxable investments. Of course, on the other end, when distributions are made, those distributions are taxed, at that time. Tax deferred strategies for IRAs have current contribution limits of $6000 per year ($7000 if over 50 years old). For 401ks that can mean contributions of up to $19,500 ($26,000 if over 50) with a total annual maximum of $63,500 given certain limitations from their salaries and those plans that involve a company contribution through a profit-sharing plan to add to that. SIMPLE plans work similarly but with lower limits (and might be attractive to small companies). There are merits and considerations for SEP plans as well. Lastly, some people, particularly in their 50s or 60s might be wanting or needing to catch up on retirement savings and there are plans such as Defined Contribution Plans (DBPs) where the individual can potentially contribute 100% of their earnings within limits. Those plans currently would max out at $230,000 per year in contributions. It is important to seek professional tax planning assistance when considering any of these.
At The First Wealth Management, we encourage our clients to 1) concentrate to accumulate and then diversify to preserve 2) to monitor and make changes to their strategies over time vs overnight 3) consider the impacts that taxes can have on their savings and investments.
The First Wealth Management is located at First Florida Bank, a division of the First, A National Banking Association, 2000 98 Palms Blvd, Destin, FL 32541 with branch offices in Niceville, Mary Esther, Miramar Beach, Freeport, and Panama City. Phone 850.654.8124.
Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC, or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc.
The First Wealth Management First Florida Bank, and The First, A National Banking Association are not registered broker/dealers and are independent of Raymond James Financial Services.
Views expressed are the current opinion of the author, not necessarily those of RJFS or Raymond James, and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.
Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Investors should consult their investment professional prior to making an investment decision.
Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
Treasury Inflation Protection Securities, or TIPS, adjust the invested principal base by the CPI-U at a semiannual rate. Rate of inflation is based on the CPI-U, which has a three-month lag. Investing within specific sectors, or in small and mid-size companies, involves unique, additional risks. Those risks include limited diversification, regulatory risks, limited liquidity, and lack of operating history.
There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
Investors should carefully consider the investment objectives, risks, charges, and expenses of mutual funds before investing. The prospectus and summary prospectus contain this and other information about mutual funds. The prospectus and summary prospectus are available from your financial advisor and should be read carefully before investing.
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