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Wealth Management And Tax Planning: How It All Works

Posted by Jim Kantowski, CFP®, CPA on February 18, 2021

Wealth Management And Tax Planning: How It All Works

Tax planning is an integral part of the ongoing wealth management process for several reasons. When you work with a financial firm that combines wealth management and tax planning expertise, you have the opportunity to reduce your tax bill, increase your wealth and investment returns, transfer more money to your heirs, and even spend more—so you can live your best life!

In this blog post, we’ll dig into how wealth and tax management are interconnected, as well as explore the typical tax planning management process.

Do you know which accounts to hold and when to make contributions or withdrawals to minimize your tax burden? Schedule a call with Bay Point Wealth today to uncover tax savings opportunities.

What is wealth management?

Wealth management is the process of creating and implementing your financial plan while considering a broad range of factors, such as investments, insurance, retirement savings, estate planning, and—of course—taxes. This is an ongoing journey on which your financial advisor should guide the way with your best interests at the forefront.

Wealth management should always focus on your entire financial picture to ensure you achieve your goals while paying as little tax as possible.

What is tax planning?

Tax planning management is an essential part of financial planning. It involves proactively seeking opportunities to take advantage of short- and long-term tax savings. This can enable you to reduce your current tax bill, defer taxes, or minimize taxes on your wealth in the future. You want to hold onto as much of your hard earned assets as possible, which means you need to consider the tax implications of your financial decisions. Tax planning can help with this process.

It’s important to work with an advisor who is up to date on current tax law, so you can take advantage of current deductions, credits, tax rates, and other opportunities to decrease your tax burden. You will want to know how taxes affect your current investment decisions, along with the long-term impact of taxes in the future, so you can build your wealth and keep more of it for you and your family.

Why approach wealth and tax management together?

Wealth management and tax planning go hand in hand for several reasons. First, let’s explore two of the issues that can occur when you don’t approach these areas of financial planning with a coordinated effort.

Tax Planning Issues To Avoid

1. Short-Term Problems

If you don’t proactively manage your taxes (for example, if you don’t save your money in the right accounts, take advantage of low tax brackets when possible, and leverage other tax planning strategies), you can pay more tax than necessary in the short term, which leads to less money in your own pocket.

In addition, if you’re working with an investment manager or considering hiring one, it’s crucial to gain an understanding of their perspective on taxes. Many investment managers say they don’t let taxes drive their investment philosophy because it holds them back from ensuring you receive the highest possible returns.

However, at Bay Point Wealth, we believe you have a better chance of reaching your goals and increasing your returns by controlling what you can control and taking taxes into consideration as part of your overall investment strategy. For example, instead of engaging in short-term trading in hopes of generating quick returns (which can lead to short-term capital gains that are taxed at higher rates), you can take a long-term approach and hold onto your investments for a minimum of one year. This can lead to a longer tax deferral window, lower capital gains rates, and the potential to pass assets down to your heirs without paying capital gains tax at all!

2. Long-Term Problems

Without proper tax planning, you may miss opportunities to make contributions to tax-efficient accounts that could provide you a large tax break upfront, then enable you to take distributions in the future at a lower tax rate.

For example, say you’re in your working years and in a high tax bracket now, but you expect to be in a lower tax bracket during your retirement years. In this case, consider saving your money in a company retirement account, such as a 401(k) or an Individual Retirement Account (IRA) on a pre-tax basis. This will allow you to take a deduction while you’re subject to a higher tax rate and pull the funds out later at a lower tax rate.

In contrast, if you anticipate being in a higher tax bracket later in life, it’s a wise choice to open a Roth IRA, which does not provide for an upfront tax deduction, but will enable you to make tax-free withdrawals in the future. Not only will these choices have an impact on your money—they will likely have an impact on the wealth you pass to future generations, which makes these decisions even more valuable.

Now that we’ve covered the short- and long-term problems that can arise as a result of improper tax planning, let’s dig into the benefits of approaching wealth management and tax planning in tandem.

Benefits Of Coordinated Wealth And Tax Management

1. Focusing On Your Goals

Taking a proactive, goals-based approach to tax planning as part of your overall wealth management strategy helps to achieve your financial objectives while reducing your tax burden at the same time. It’s anything but taxing (pun intended).

For example, if your goal is to fund your child’s education, your financial plan should reflect this goal by allocating money in tax efficient accounts such as a 529 account, which may allow you to take a state tax deduction. If you use the funds for education, the growth will be tax free. Unlike IRAs and Roth IRAs, 529 accounts don’t have income limits, which can put a cap on the amount of money you can contribute each year. 529 accounts also provide flexibility for withdrawals, making these vehicles an ideal option for accumulating a nest egg by the time your child heads off to college.

In addition, if you have charitable objectives, coordinating your wealth management and tax planning activities is a smart move to minimize both your current and future taxes. You may want to set up a donor-advised fund, which allows you to receive a tax deduction for the money you deposit, even if you haven’t chosen a charity (or charities) to donate to yet. This is a great way to reduce your tax bill during a high-income year.

2. Increasing Your Wealth

Aside from taking a goals-based approach to save money at tax time and place you on the path to a successful financial future, there are other tax-based strategies you can employ to grow your wealth.

For example, you may opt to take advantage of Roth IRA conversions, which involve withdrawing money from your traditional IRA and converting the funds into a Roth IRA. While you’ll have to pay tax on the money you convert, the funds will grow tax-free once they’re in a Roth IRA.

The Wealth Management And Tax Planning Process, Explained

Here’s how we integrate wealth management and tax planning for our clients at Bay Point Wealth.

Review Your Financial Situation And Make A Plan

First, we’ll sit down with you to gain an understanding of your priorities when it comes to money, as well as your personal financial goals and circumstances. This process includes reviewing your income and expenses, marginal tax rate, and any deductions and credits available to you. But don’t worry—we will keep it simple and in terms you can understand.

As we get to know your situation, we’ll discuss the assets you currently own and determine the accounts in which they’re located, as well as the tax implications that may be associated with moving those assets.

For example, if you hold highly appreciated company stocks, mutual funds or ETFs, there could be tax consequences associated with selling those investments. This is why we need to know which investments you hold and the accounts in which they’re located: so we can help you build a tax-efficient portfolio and appropriately fund your accounts to decrease your taxes today and produce lower taxable income in the future.

Manage Your Investments In A Tax Efficient Way

Just like we’ll be with you every step of the way as you accumulate savings and assets in your working years, we’ll also provide guidance later in life as you withdraw money to fund your retirement and explore opportunities to pass wealth down to future generations.

It’s essential to withdraw money from the right accounts in your golden years. We’ll work with you to ensure your withdrawals consider your tax rate at the time you access funds, so you won’t end up paying unnecessary taxes.

In addition, when it’s time to put an estate plan in place, we’ll bring trusted estate planning attorneys into the conversation to create a solid plan for distributing your possessions among your heirs.

Are you seeking tax expertise?

Our team of seasoned financial advisors includes Certified Financial Planners and Certified Public Accountants with a deep understanding of tax law. At Bay Point Wealth, we have keen eyes for reducing your tax burden as part of your big picture financial plan. Schedule a call with us today to get started.

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