There are many tax planning strategies that high income earning households need to consider. With the top income tax rate at 39.6 percent, it is becoming increasingly important for people to be savvy about their tax-saving strategies. In many ways, finding tax advantages for people in the higher income brackets is a constant challenge. So while even the most experienced money managers may be able to find tax alpha for you, creating it year-over-year is more difficult now with changes to gift and estate tax regulations.
Some common strategies to lessen the tax burden on high income brackets are to:
- Integrate tax-enhanced investments into your portfolio.
- Hold concentrated portfolios with low turnover to manage investments.
- Seek out tax-loss harvesting opportunities for your portfolio.
- Shift your investments into entities designed for estate planning and wealth transfer.
While these are certainly options to explore with your financial adviser, two readymade strategies that may help you today are Roth IRA conversions and life insurance.
"Strategies that may help are Roth IRA conversions and life insurance."
Are Roth IRAs right for you?
One way to potentially mitigate the impact of estate taxes is to use Roth IRAs. These can be tax-efficient options, but it is important to pay close attention to your state income tax laws in addition to federal and state estate tax laws before converting your traditional IRA into a Roth.
State income tax may be an overlooked aspect of Roth IRA conversions, but they are just as important as estate taxes. For example, if you live in Connecticut but plan on moving to New York, your income tax rate will change significantly. In New York, the highest income tax rate is 8.82 percent on all taxable income of $2,125,450 and up, while the top tax bracket in Connecticut is 6.99 percent on all taxable income of $500,001 and up.
It is also important to separate your Roth IRA conversions. If you are thinking about switching to a Roth IRA from a traditional IRA, you want to think about shifting assets over a long period of time, rather than all at once. Depending on the state and federal tax impact, you may want to consider several conversions. It may also benefit you to separate your Roth IRA accounts because it gives you more flexibility and diversification. For example, if you have separate Roth accounts invested in different asset classes, this enables you to restructure your accounts if one of the asset classes you invested in does not perform well.
You may want to consider life insurance
Life insurance is another statutory tax shelter option for high income earners because it offers people in the upper tax brackets with an alternative tax savings plan.
For instance, let's say an individual has excess funds in an IRA account after required minimum distribution has started. They can simply pay the taxes when they withdraw the extra money, and open a life insurance account.
So while life insurance accounts may be a short-term cost for you, your heirs will be able to receive the death benefits income-tax free.
These are just two examples of common strategies you can use in estate and wealth planning. But you should consider your financial circumstances thoroughly. That is where our team of financial advisers can help. We can sit down with you on a one-to-one basis to go through all available options that address your specific financial needs.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. It is not intended to be a substitute for individualized legal or tax advice. Please consult your legal or tax advisor regarding your specific situation. No strategy assures success or protects against loss.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10 percent IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.