Whether you’re saving, investing, spending, bequeathing, or receiving wealth, there aren’t many moves you can make without considering how taxes might influence the outcome. There’s lots of talk about higher taxes, but little certainty on what may come of it, and who it might affect.
How do we plan when we cannot know? Regardless of how tax laws evolve, there are various tax breaks to encourage us to save toward major life goals like retirement, healthcare, education, emergency spending, charitable giving, and wealth transfer.
To make the best use of these “tools of the trade,” let’s take a look at some of the most common saving vehicles for tax breaks.
Saving for Retirement
Many tax-favored accounts exist for saving for life in retirement. For example, there are employer-sponsored plans, like 401(k), 403(b) and SIMPLE Individual Retirement Accounts (IRAs). If you are a business owner or simply want more options, there also are individual IRAs you can establish outside of your employer.
Regardless of which type of retirement account chosen, your dollars can grow tax-free while they remain in the account. This helps your retirement assets accumulate more quickly than if they were subject to the annual taxes that taxable accounts incur (such as through realized capital gains, dividends, or interest paid).
Tax treatments for different types of retirement accounts can differ dramatically from there. For some, you can make pre-tax contributions, but withdrawals are taxed at the ordinary income rates for that year. For others, you can contribute after-tax dollars, but withdrawals are tax-free—again, with some caveats. Each account type has varying rules for when, how, and how much money you can contribute and withdraw without incurring burdensome penalties or unexpected taxes owed.
Saving for Healthcare Costs
The Healthcare Savings Account (HSA) offers a rare, triple-tax-free benefit to help families save for current or future healthcare costs. You contribute to your HSA with pre-tax dollars that grow tax-free, and you can spend the money tax-free on qualified healthcare costs. Plus, you can invest your HSA dollars that can be spent tax-free years later, as long as it’s on qualified healthcare costs.
Some accounts may even allow you to use your HSA funds for non-healthcare-related expenses after you reach a certain age. One thing to note is that HSAs are only available as a complement to a high-deductible healthcare plan, to help cover higher expected out-of-pocket expenses. In many cases, once you contribute to an HSA, the funds are yours for the foreseeable future, whether or not you have a high-deductible healthcare plan.
In addition to HSA options, your employer might offer a Flexible Spending Account (FSA) that allows both you and your employer to add pre-tax dollars to spend on out-of-pocket healthcare costs. Keep in mind that with an FSA, funds must be spent relatively quickly (typically before the year ends), so investment and tax-saving opportunities are limited.
Saving for Education
Among the most familiar tools for catching a tax break are 529 plans for educational costs. You fund your 529 plan(s) with after-tax dollars. 529 plans grow tax-free, and the beneficiary (usually, your kids or grandkids) can use the funds tax-free on qualified educational expenses. Should your beneficiary not need the funds, due to a scholarship or change in plans, there are several other ways you may be able to reallocate the funds.
Saving for Giving
The Donor-Advised Fund (DAF) is among the simplest, but relatively effective tools for pursuing tax breaks for your charitable giving. Instead of giving smaller amounts annually, you can establish a DAF, and fund it with a larger, lump-sum contribution in one year. You can then recommend DAF distributions to your charities of choice over future years. Combined with other deductibles, you might be eligible for a sizeable tax write-off the year you contribute to your DAF—beyond the currently higher standard deduction. There are other resources for higher-end planned giving that will likely require you to collaborate with a team of tax, legal, and financial professionals.
Saving for Emergencies
A variety of tax-friendly incentives exist to help you facilitate general “rainy day fund” saving, and to offset crisis spending, like the kind many of us have been experiencing during the pandemic. These include state, federal, and municipal savings vehicles; along with targeted tax credits and tax deductions. Ask your financial advisor for the options available to you.
Saving for Heirs
Last but not least, a bounty of trusts, insurance policies, and other estate planning structures help families leverage existing tax breaks to tax-efficiently transfer their wealth to future generations. With recent negotiations surrounding the tax treatment of inherited assets, this may be a good time for families to revisit their estate planning.
Whether times are turbulent or tame, there are an array of best practices we can follow to reduce our lifetime tax obligations.
To learn more about the saving options available to you, schedule an appointment with one of our financial advisors.
Atlantic Union Bank Wealth Management advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. All expressions of opinion reflect the judgment of Atlantic Union Bank Wealth Management and are subject to change at any time.
Atlantic Union Bank Wealth Management is a division of Atlantic Union Bank that offers asset management, private banking, and trust and estate services. Securities are not insured by the FDIC or any other government agency, are not deposits or obligations of Atlantic Union Bank, are not guaranteed by Atlantic Union Bank or any of its affiliates, and are subject to risks, including the possible loss of principal. Deposit products are provided by Atlantic Union Bank, Member FDIC.