Tax-Smart Investing

Tax-Smart Investing

Taxes are important to consider when choosing how, when, and where to invest. The decisions you make could significantly impact how you are able to reach your goals. The better investment choices you make, the more progress you will make for your future. At TruNorth Advisors, we want to help you reach your goals without being delayed unnecessarily by taxes. When you have a high federal income tax rate, you can benefit even more so by taking advantage of tax-smart investment opportunities. Consider the following strategies to help you minimize your taxes and maximize your gains:

Prioritize Investing in Tax-Efficient Accounts—Contributing to IRAs and 401Ks can lower your taxes both now and in the future. Thankfully, traditional IRAs are tax deductible and traditional 401ks allow you to make pre-tax contributions, which lower your current taxable income. There are limitations on how much can be contributed though. Traditional IRAs and 401ks can have tax-free or tax-deferred growth potential, which will be beneficial in the future. If you are unsure about your options for maximizing IRAs and 401ks, our team will be happy to help.

Keep Your Accounts Diverse—When you spread your investments into different options, you can minimize your tax burden. Your finances could be spread between traditional IRAs, Roth IRAs, and brokerage accounts. All these opportunities have different long-term benefits. As previously mentioned, traditional IRAs have tax-deferred growth potential. Roth IRAs can potentially grow without being federally taxed depending on the account owner’s requirements. Brokerage accounts have taxable growth potential. With the right combination of investments, you can conserve and grow your finances. Diversifying your accounts can help you be prepared if your tax rate is lower or higher in the future.

Explore Tax-Efficient Investments—There are many different opportunities which could be beneficial for your taxes. Consider the benefits of mutual funds, index funds, municipal bonds, and exchange-traded funds. Some of these options may be tax-free at the federal and/or state level. At TruNorth Advisors, we can help you find the most suitable options to fit your circumstances.

Place Your Investments in The Right Account Type—The goal is to maximize your benefits and minimize your tax liability. For example, if you have investments that regularly generate taxable income, such as taxable bonds or stock funds with high turnover rates, could be better maximized by placing them in tax-deferred accounts like traditional IRAs. If you are unsure if your investments are consistent with reaching your long-term goals, reach out to TruNorth Advisors for guidance and support.

Avoid Capital Gains Whenever Possible—Avoiding taxes may not always be a good reason to hold a stock, but it certainly can be wise if you will be subject to significant capital gains taxes. Holding a stock for at least a year to avoid capital gains taxes may be worthwhile long-term.

Utilize Tax Loss Harvesting—Depending on how your investments have done over the year, you may be able to use tax loss harvesting to your advantage. If your losses exceed your gains, you can offset up to $3000 of your taxable earned income.

Tax responsibility should not be the only consideration when investing for your future but being intentional with tax-smart strategies can be beneficial for reaching your goals. If you are interested in learning more about how to minimize your liability and maximize your investments, schedule a consultation with TruNorth Advisors.

IRA Distributions

IRA Distributions

It is a common misconception that IRA distributions are counted as normal earned income, which could potentially hurt your Social Security Income. if you are taking it before the age of 66, that is simply not true. It is considered investment income.

At Tru North Advisors, we aim to educate on the common misconceptions that even other trained professionals sometimes misunderstand and under educate on. When in doubt, you can always fact check with the Social Security Administration office to clarify.

Fact: The Social Security Administration does not count IRA distributions as income when determining your annual benefits, but the IRS does count them when determining your tax liability—Roth IRA distributions are the exception for both agencies. Before you start converting your IRA distributions to Roth IRA distributions, be aware that you will likely pay taxes on the converted amount and your social security benefits as a result.

How the Social Security Administration Defines Income:

The Social Security Administration reduces your benefits if you exceed the defined earnings limit, which is $18,240 for 2020. This number can change each year. Job wages, self-employment profits, bonuses, vacation pay, sick pay, commissions, or any other type of compensation reported on your W-2 will be factors when the SSA determines your income. Basically, pensions, annuities, interest, dividends, and IRA distributions are not counted.

How the IRS Defines Income:

The IRS uses a combined income approach to decide how your social security benefits should be taxed. Follow these simple steps to determine your combined income:

Write down your adjusted gross income (This figure should include IRA conversions and withdrawals from your work’s retirement plan or 401K and IRA distributions from your IRA account.)

Add your non-taxable interest and dividends as well as half of your annual Social Security Benefits from that year.

If the result is higher than $25,000 and $34,000, you could be taxed on up to half of your Social Security benefits. If the result is higher than $34,000, your tax liability will be on 85% of your benefits. Joint filers have different thresholds, $32,000 and $44,000. The numerical limits can change annually so make sure you have the most updated numbers.

The Bottom Line: You will not need to pay Medicare or Social Security taxes on IRA distributions, regardless of how your IRA was funded. Whether from after-tax contributions to Roth IRA distributions or pre-tax contributions to a traditional IRA or in an IRA from your workplace’s retirement plan, your Social Security taxes have already been paid. If you are unsure about any aspect of your IRA, reach out to Tru North Advisors. We want to clear up any misunderstandings you may have and help you maximize your assets.


Wealth Management

Wealth Management

Reaching your long-term goals will not happen by accident. The strategic choices you make along the way can determine your comfort level in the future. Especially for clients with high net worth, wealth management can be vitally important for protecting and maximizing your assets. Wealth management is a holistic approach to financial planning, which includes retirement planning, investment advice, accounting, tax services, legal planning, and estate planning. Our TruNorth Advisors’ team has compiled a list of the most important reasons to prioritize wealth management:

Wealth Management Helps You Maintain and Grow Your Wealth—Wealth management is tailor made to fit each client. Every client has different assets, priorities, and goals. We will work directly with you to preserve the wealth you already have and position you to reach your goals long-term. During a consultation, our team will partner with you to set out a clear plan which fits your needs specifically.

Wealth Management Should Be an Integral Part of Your Financial Strategy—Wealth management is not just investment advice. Although investments play a vital role in your financial future, wealth management considers your entire financial situation, including investments, tax services, retirement planning, accounting, legal planning, and estate planning. The best way to reach your desired financial future for you and your family is by viewing your finances holistically by using wealth management.

Wealth Management Encourages Smooth Wealth Transfer—In the future, you want your wishes to be followed for the best of your loved ones without unnecessary stress. Having a wealth manager will help ensure that taxes and fees are minimized so your wealth is preserved for your family.

Wealth Management Can Be Adjusted—Over time, your goals for the future may change. With wealth management services, we meet with you to discuss your desires and financial portfolio to ensure that your goals are still on track to be met. If there are changes, we can easily update them to suit your needs.

You have worked hard to attain your wealth so choosing to utilize wealth management to protect and grow your assets is wise. Contact TruNorth Advisors to learn more about your wealth management opportunities.