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As the old saying goes, "April showers bring May flowers," reminding us of the beauty that follows the rainy days of spring. However, amidst the anticipation of blooming flowers, there's another significant event in April that demands attention: Tax Day. April 15th is a day marked on calendars across the United States, signifying the deadline for filing income tax returns.
While many view tax season as a period of financial stress and paperwork, it's crucial to recognize that effective tax planning should not be confined to the weeks leading up to this deadline. Instead, it should be a continuous process that blooms well before the April showers.
Tax planning is not merely about filling in boxes on forms to determine the money that may be owed. t's about strategic decision-making and proactive measures to optimize your financial situation throughout the year. Just as April showers nourish the soil for May flowers, diligent tax planning nurtures your finances for future growth and prosperity. Here are five essential tax topics to consider each year:
Evaluate income sources and potential deductions well in advance. Consider any changes impacting individual financial circumstances, such as a new job, investment income, or significant life events like marriage or parenthood. Identifying deductible expenses, such as mortgage interest, charitable contributions, and medical expenses, can help minimize tax liability.
Maximizing contributions to retirement accounts not only helps to secure the future financially but also offers significant tax advantages. Review retirement savings goals annually and adjust contributions as needed to take full advantage of tax-deferred growth opportunities. Additionally, explore the potential benefits of Roth IRA conversions or other retirement planning strategies to optimize tax efficiency.
Keep a keen eye on investment portfolios and assess tax implications associated with buying, selling, or holding assets. Consider tax-efficient investment strategies such as tax-loss harvesting, which involves selling investments at a loss to offset capital gains and reduce taxable income. Moreover, explore opportunities for diversification and asset allocation to minimize tax exposure while maximizing returns.
Estate taxes can significantly impact the wealth that parents plan to pass on to future generations. Engage in comprehensive estate planning to minimize estate tax liabilities and ensure the smooth transfer of assets to any heirs. Review and update estate plans regularly, considering changes in tax laws and personal circumstances, to safeguard the estate and minimize tax burdens for your loved ones.
Stay informed about changes in tax laws and regulations that may impact individual financial situations. It’s also important to stay educated on available tax credits, deductions, and incentives to optimize a tax strategy. Additionally, ensure compliance with tax laws and regulations by maintaining accurate records, timely filing returns, and seeking professional guidance when necessary.
While April showers bring May flowers, tax planning should bloom long before the arrival of Tax Day on April 15th. By adopting a proactive approach to tax planning and addressing key tax topics throughout the year, individuals can optimize their financial well-being, minimize tax liabilities, and cultivate a brighter financial future.
Just as spring brings renewal and growth, diligent tax planning can lead to financial prosperity and peace of mind for years to come. Talk to a financial professional to get started.
Once retirees reach age 73 (as per the latest SECURE Act changes), they must start taking Required Minimum Distributions (RMDs) from tax-deferred accounts such as 401(k)s and traditional IRAs. Failure to comply can result in hefty penalties. Understanding how to calculate and manage RMDs is essential to maintaining tax efficiency and financial stability.
The IRS provides a formula for RMD calculations based on life expectancy and account balances. Here’s how to approach it:
Retirees can mitigate the tax impact of RMDs by incorporating these strategies:
For charitably inclined retirees, QCDs offer a tax-efficient way to satisfy RMD requirements:
By proactively planning with a financial professional to leverage tax-efficient strategies, and explore charitable giving, retirees can minimize tax burdens and maximize their retirement wealth.
For employees and businesses alike, saving on taxes while accessing essential benefits is always a priority. Fortunately, Section 125 of the Internal Revenue Code—often referred to as “cafeteria plans”—provides an effective way to achieve both goals. These plans allow employees to set aside a portion of their income before taxes to cover various expenses, including health insurance premiums, medical costs, and dependent care services. By reducing taxable income, employees pay less in taxes, while employers also benefit from lower payroll and workers’ compensation costs. It’s a strategy that offers flexibility and financial advantages to all parties involved.
A Customizable Benefits Menu
Much like a cafeteria-style dining experience, these plans offer employees a menu of employer-sponsored benefits to choose from. Employers may contribute to these benefits in different ways, such as providing an annual benefits allowance that workers can apply toward coverage or take as salary. This structure gives employees greater control over their benefits while allowing employers to manage costs efficiently.
One of the simplest forms of a cafeteria plan is the Premium Only Plan (POP). This arrangement enables employees to allocate pre-tax earnings toward their share of premiums for employer-sponsored insurance plans, such as medical, dental, disability, accident, and group-term life insurance. A POP is easy to implement and administer, requiring no additional benefits to be introduced by the employer.
Flexible Spending Accounts (FSAs)
For those seeking additional tax savings, cafeteria plans often include Flexible Spending Accounts (FSAs). These accounts allow employees to set aside pre-tax dollars to cover out-of-pocket medical expenses or dependent care costs.
With a medical FSA, employees estimate their annual healthcare expenses at the start of the year and commit to regular payroll deductions to fund the account. This money can then be used for qualified expenses such as deductibles, co-payments, prescriptions, over-the-counter medications, and even orthodontic treatments. Since most taxpayers do not accumulate enough medical expenses to qualify for a federal tax deduction, an FSA provides a way to receive tax benefits on healthcare costs that might otherwise be out-of-pocket.
A dependent care FSA works similarly, helping employees cover the costs of childcare or eldercare. Up to $5,000 per year in pre-tax earnings can be allocated toward expenses such as daycare, after-school programs, or care for an adult dependent who is unable to care for themselves. Employees must weigh whether using an FSA or claiming the child and dependent care tax credit on their tax return offers greater savings.
However, FSAs come with a key limitation—the “use-it-or-lose-it” rule. Any unused funds remaining in an employee’s FSA at the end of the plan year are forfeited, though some employers may offer a short grace period of up to 2.5 months for spending the remaining balance. Employees must plan carefully to maximize their savings without losing unused funds.
Health Savings Accounts (HSAs) and Cafeteria Plans
In addition to FSAs, cafeteria plans may also include Health Savings Accounts (HSAs). HSAs are tax-advantaged accounts designed to help individuals with high-deductible health plans (HDHPs) save for future medical expenses. Unlike FSAs, HSA funds do not expire at the end of the year, making them a valuable long-term savings tool for healthcare costs.
Employees can contribute to an HSA through a cafeteria plan, using pre-tax dollars to reduce their taxable income. Employers may also choose to contribute to an employee’s HSA, further enhancing the benefit. HSA funds can be used for a wide range of qualified medical expenses, including doctor visits, prescriptions, and even long-term care services. Since the balance rolls over each year and can even be invested for growth, HSAs provide a flexible and cost-effective way to manage healthcare expenses over time.
A Simple and Cost-Effective Solution for Employers
For business owners, setting up a Section 125 cafeteria plan can be a straightforward process that offers significant advantages. These plans not only provide tax savings but also empower employees to take an active role in managing their benefits. By offering a range of pre-tax options—from insurance premiums and FSAs to HSAs, employers can enhance their benefits package while keeping costs under control.
Cafeteria plans remain an effective and flexible way to help both employers and employees maximize their financial well-being while enjoying a customized approach to workplace benefits.
After finishing last year’s taxes, it’s a great time to start planning for the next year. A smart tax plan doesn’t have to be complicated—it’s about taking simple steps now to save money later. Here are five straightforward strategies that can help in building a tax plan that works:
1. Tax-Loss Harvesting
Some investors choose to sell investments that have lost value in order to balance out gains from other sales. This process, known as tax-loss harvesting, can lower the amount of taxes owed. Even though the loss isn’t recovered, it helps reduce the overall tax bill. After selling, an investment in a similar category is often purchased to keep the portfolio on track.
2. Taking Advantage of Tax-Free Long-Term Gains
For those in the right tax bracket, long-term gains can be tax-free. A financial professional can look for opportunities and advise on this strategy. If available, this option can lead to noticeable savings over time.
3. Contributing to an IRA
Contributions to a Roth or traditional IRA can be made until Tax Day in April, for the prior tax year. Experts suggest making these contributions as early as possible—even using a tax refund for the contribution can be a smart move. For those who are eligible to contribute to a Roth IRA, it has an additional benefit, since it earns income tax-free!
4. Using the Backdoor Roth
Some individuals might earn too much money to make a direct contribution to a Roth IRA. In these cases, the backdoor Roth strategy can be a clever workaround. It works by taking contributions to a traditional IRA and then periodically converting them to a Roth IRA. Only the growth between the time of the original contribution and the conversion to the Roth may be subject to tax.
5. Deferring Taxes with Smart Investment Choices
Certain financial products allow taxes on dividends, interest, and capital gains to be deferred. This means taxes aren’t payable immediately. Deferring taxes allows investment growth to compound more efficiently, adding significant benefits down the road.
To take advantage of key tax strategies, planning ahead is key. Instead of waiting until the last minute, talk with a financial adviser or tax professional now. These strategies can help to build an effective tax plan, securing a better financial future.
Through the years, goals will change, and strategies will shift, as personal needs differ in various phases of life. However, the need for regular saving and investing spans many life stages. Here are some common goals and possible portfolios strategies for four life stages. Though each person’s requirements may differ, these examples will help lay a common foundation.
Many Americans begin regular saving and investing in their mid-to-late 20s or early 30s. Goals may range from the immediate need to buy a home to the establishment of an education fund for the kids, and even retirement funding, although it might seem like decades away.
In young adulthood, the time horizon is long, and it’s a good time to let funds grow. There is a longer period in which to recover from unpredictable market fluctuations, and a higher risk tolerance is common with savings and investments. Historically, stocks have outpaced other investments, as well as inflation, over the long term. It’s a good time to consider stock funds that seek growth. Another consideration in portfolio planning is an automatic reinvestment plan, to take advantage of market ups and downs. For diversification, bonds or a stock and bond fund may be a good option. Remember to utilize tax deductions offered by Individual Retirement Accounts (IRAs) (if eligible), as well as the long-term tax-deferred growth offered by employer-sponsored retirement plans.
Regular investing becomes even more important as goals come into sharper focus. Education funding may become a high priority, and a vacation home or other major purchases (the dream boat) may be within reach. Retirement seems closer.
It’s a good time to consider repositioning funds in the portfolio for a better balance of growth and income investments. While there is still time to benefit from growth provided by stock funds, income-producing bonds or stock and bond funds become valuable, as kids approach college-age.
Many individuals reach their peak earning years in their mid-40s, and this gives rise to tax considerations. Now may be the time to look at tax-free bond funds, since continued tax-deferred investments for retirement are becoming more critical.
Children may no longer be part of the day-to-day financial equation, but there may be new “dependents” to consider. Aging parents may need increased assistance, both physically and financially. Larger financial gifts to children and even grandchildren may be a high priority. In addition, there may be a need to guard and increase retirement funds. Reducing tax obligations and overall debt becomes more important as retirement approaches.
With a shorter investment horizon, it’s time to reconsider heavily investing in stock funds and possibly diversifying into more bond funds. A more conservative investment vehicle provides a way to preserve accumulated assets. Tax-free bond funds can help reduce the tax bite as peak earning years continue.
Tax reduction and protection from inflation are key in retirement. An ample income stream is critical as employment income disappears and is replaced, only in part, by Social Security or other pension funds.
Growth stock funds may become a smaller player in a portfolio, as a greater emphasis on income-generating stock and bond funds, and tax-free bond funds protect from taxation. However, to stay ahead of inflation, some exposure to growth stocks could be an important strategy.
When investing, bear in mind that investment return and principal value will fluctuate due to changing market conditions. When shares are sold, they may be worth more or less than their original cost.
Diversification and regular investing are important at any stage of the life cycle, but the real key to success is planning. Review goals and determine if the current strategy is geared to meet them. Regular professional financial advice can keep a portfolio moving in the right direction, toward the fulfillment of your personal financial goals and the secure, comfortable future you desire.
Aging is inevitable, but how we age is, to a significant degree, within our control. For adults between the ages of 35 and 55, contemplating the years leading up to retirement offers a unique opportunity. It's a chance to not only plan for financial security but also to invest in long-term health and well-being.
In essence, it’s time to define and act upon what constitutes "healthy aging."
Healthy aging doesn't only mean freedom from disease or disability, though that's a part of it. It also encompasses the holistic well-being of individuals – physically, mentally, and socially. This means optimizing opportunities for good health, so older adults can lead active lives and be a vibrant part of their communities.
Balanced Nutrition: The foundation of good health at any age begins with what you eat. A diet rich in whole foods, such as fruits, vegetables, lean proteins, and whole grains can help stave off chronic diseases. Equally important is ensuring you're getting enough essential nutrients, like calcium and vitamin D.
Regular Physical Activity: Whether it's walking, swimming, or practicing yoga, staying active helps maintain muscle mass, bone density, flexibility and cardiovascular health. Moreover, it boosts mood and can aid in warding off mental health issues like depression.
Mental and Cognitive Health: Keeping the brain active and engaged is critical. This can be achieved through reading, puzzles, taking up new hobbies, or even engaging in continuous learning. Social connections and interactions, be it with friends, family, or community, also play a vital role in cognitive wellness.
Regular Health Screenings: Periodic check-ups, even if you feel fine, are crucial. They can detect potential problems early when they're most treatable. This includes screenings for blood pressure, cholesterol, bone density, and specific cancers, among others.
Avoiding Harmful Habits: This may seem obvious, but it bears repeating, refrain from smoking, limit alcohol consumption, and avoid recreational drugs. Each of these can have detrimental long-term effects on your health.
Maintaining a Healthy Weight: Being overweight can lead to a slew of health issues, including diabetes, heart disease, and certain cancers. If weight loss is needed, it's essential to approach it in a sustainable and healthy manner.
Managing Stress: Chronic stress can have both immediate and long-term effects on health. Finding ways to manage it, whether through meditation, exercise, therapy, or hobbies, can significantly improve overall well-being.
When key components of healthy aging are addressed, the golden years can truly shine. Healthy aging means more than just living longer, it means living better. Living better means the ability to enjoy leisure activities, spending quality time with loved ones, traveling, and simply enjoying the peace of retirement.
Furthermore, healthy aging translates to decreased healthcare costs, lesser dependence on medications, and a reduced need for long-term care. It gives older adults the autonomy they desire and the quality of life they deserve.
It's a good time to cultivate habits that nourish both the body and the mind, to ensure the journey into retirement and beyond is filled with vitality, joy, and purpose. Healthy aging isn't just about adding years to life – it's about adding life to your years!
Have you considered whether your financial house is in order? Now that we are into the new year, it’s a good time to take inventory and spruce it up. Review the following helpful hints to update your financial home!
That's the spot where you have stored items such as old, unused credit cards, bank accounts under $100, or savings bonds you forgot to cash in. Close them out or cash them in.
This can include refinancing your mortgage while mortgage rates remain low, transferring credit card balances to lower rate alternatives and utilizing a home equity line that offers a low rate and tax deductibility of interest. You will appreciate the new “look” you create. It can be especially pleasing to empty the "room" of some credit commitments by paying them off completely, thus giving your overall budget more breathing space.
Is it time to rebalance your investment portfolio? You may be at a stage of life that requires different investment tactics. Another area to review is your life insurance. The plan you established years ago may need updating to meet your current needs.
What accommodations have you made for your retirement? One of the best mechanisms in today's changing world of taxes may be the 401(k), which can provide you with current reduction of taxable income, an excellent savings plan, and tax-deferral on earnings.
Now may be a good time to review your life insurance policies. Setting up an annual review with your insurance professional can be instrumental in ensuring the adequacy of your coverage.
Update your homeowner's policy and make a video of your home--both inside and out--as well as your valuables. Save it in a safe place and add to it as the need arises.
The time when you will need them is fast approaching. You may also want to speak with your tax advisor regarding changes you need to make to brighten your tax picture before filing your return.
If you haven't done so previously, set up a budget. Make "paying yourself first"-- putting a set amount into your savings and investments every month--a priority. Analyze your current spending habits and plan ahead for large bills and expenses. It is always more relaxing to live in a clean and orderly home. By taking these eight steps, your financial home will become an inviting, enjoyable corner of your life!
Employer-sponsored retirement plans, such as 401(k) or 403(b) plans, have become an essential part of the benefits package offered by companies to attract and retain employees. One of the key features of these plans is the employer's matching contribution, which can vary from company to company.
A relatively small number of employers offer generous matching contributions, exceeding the standard dollar-for-dollar match, to enhance their recruitment efforts and compensate for discontinuing defined benefit pension plans.
Let’s examine how these rich matching contributions can boost employee savings and support recruitment and retention efforts.
In today's competitive job market, companies are constantly seeking ways to attract and retain top talent. Offering a generous employer match for retirement savings plans is one such strategy.
Employees who feel that their employer is invested in their long-term financial well-being are more likely to stay loyal to the company. Moreover, candidates comparing job offers may be swayed by a more attractive retirement savings match, making it a valuable recruiting tool.
Many companies have phased out traditional defined benefit pension plans, which guarantee employees a specific income upon retirement. These plans have become less popular due to the financial risks and costs associated with maintaining them.
By offering a richer matching contribution for their defined contribution plans (e.g., 401(k) or 403(b) plans), employers can help offset the loss of the guaranteed income provided by pension plans, ensuring that their employees can still build substantial retirement savings.
Employers who are concerned about their employees' ability to retire comfortably may choose to provide a more generous match to help workers build their retirement savings faster. A rich matching contribution can significantly accelerate the growth of an employee's retirement savings, reducing the risk of financial insecurity in retirement.
This not only benefits the employees but also helps to establish a positive company culture where workers feel supported and valued.
While relatively few employers offer rich matching contributions for their employees' retirement savings plans, those that do so reap numerous benefits. By demonstrating a commitment to their employees' long-term financial well-being, companies can foster loyalty and trust, which ultimately contribute to a more successful and prosperous organization.
As the job market continues to evolve, employers may want to consider exploring richer matching contributions as a means to gain a competitive edge in attracting and retaining top talent.
The holidays are a time for celebration, indulgence, and connecting with loved ones. But now that it’s the new year, it’s a good time to recommit to healthy eating. Being intentional with good choices helps to maintain health and energy levels, potentially avoiding costly consequences down the road. Financial budgeting and planning principles can also apply to eating and drinking. Consider the following strategies:
Just as it’s good to review financial portfolios periodically, start the new year by conducting a personal “health audit.” Take stock of food and beverage choices at the end of 2024.
Just as it’s not wise to spend money before knowing the budget, the same financial principles can apply to eating and drinking.
Think of every food or drink choice as an investment in overall well-being. Some options deliver a higher “ROI” than others.
In finance, deferring costs often comes with hidden consequences – interest, fees, or long-term debt. The same is true for overindulging in unhealthy food and drinks.
In finance, successful investing is about delayed gratification and long-term planning. This same mindset works for health too!
The holidays should be enjoyed! An occasional indulgence won’t ruin consistently smart choices – or the bank account. Starting now with healthy choices makes it easier to stay on track and meet health goals in the new year. What better way to start the new year than by feeling energized and confident!