More Money, Less Taxes: Understanding Tax Efficiency

Part of financial planning is to use tax-efficient strategies. Aspen Wealth Strategies helps minimize a client’s tax burden and maximize their savings.

People often focus on their total return on investments as a way to measure the success of their financial planner. But sometimes it makes more sense to earn less interest if the interest is tax free. The tax savings can then be invested and, with the power of compounding interest, could earn tens or even hundreds of thousands of dollars more over a lifetime.

Tax Efficiency with Individual Retirement Accounts

Aspen Wealth Strategies recommends people paying 22% or less in taxes focus on a Roth Individual Retirement Account. The huge advantage here is your earnings grow tax-free. Although you pay tax on your original investment, you won’t pay taxes when you withdraw money from the account later. Over the lifetime of your investment, you are most likely to benefit from the tax-free earnings. The Roth IRA contribution phases out, but most Americans can contribute the maximum of $6,000, and $7,000 for individuals over 50.

For people in a 24% or higher tax bracket, a traditional IRA allows tax-deductible contributions that lower your current tax burden. Your IRA contribution is 100% tax deductible, so that can represent a significant tax payment reduction come tax time. However, when you withdrawal money you will pay taxes, but most likely less than you would the day you invest. The IRA contribution limit is $6,000 for individuals, $12,000 for couples under 50, and $7,000 for individuals over 50.

Tax Efficiency Beyond Investments

One of the biggest mistakes we see people make is thinking that if they don’t have a lot of money, tax efficiency really doesn’t matter.

But it does! Tax efficiency isn’t just for investments. It’s about being aware of other deductions, like student loan interest, capital losses and medical expenses.

For example, self-employed people have a host of potential deductions for greater tax efficiency—things like health insurance, a vehicle, home office, books and magazines, and continuing education are all possible deductions.

One amazing tax efficient strategy is using a health savings account (HSA). An HSA is an account that allows you to save for medical expenses, and it’s the only savings vehicle out there that is called triple tax advantaged. Here’s how:

1. It’s tax deductible, so your contributions lower your income tax payments
2. It grows tax deferred
3. When you withdraw from it for medical purposes, it’s tax free

We know at some point in our lives, everyone is going to have medical expenses. Private premiums, eye care, even over the counter medication—health care is one of the most major expenses for retirees. An HSA allows you to pay for those expenses from your tax efficient account, using a debit card.  Each family can contribute $7,100 per year to an has with a qualifying medical plan. It is important to note, not all medical plans will work with HSAs.

Bottom Line

Everybody thinks they need an accountant to save on taxes, but at Aspen Wealth Strategies our team of certified financial planners can guide you on saving money on taxes, risk management, staying on track for retirement and so much more. Get in touch with an adviser if you’re ready to start making your money work harder for you today!