Your money, your taxes

Long-term financial goals
Your money, your taxes

The Bigger Picture

Recognizing how daily habits – diet, sleep, physical fitness – can affect finances is an important consideration when it comes to where we are and where we want to go.

Jody A. Brown, CLU ChFC, ® CFP, ® vice president-wealth management at Summit Financial Advisors, says the same is true in establishing the financial habits that lead to a satisfying retirement or other big dreams. “A financial plan can help you connect the dots and see how small changes in the short term can help you achieve and live those dreams,” Brown notes.

Summit Financial Advisors, which services Summit Credit Union, offers comprehensive financial and insurance services at Summit branches throughout southeastern Wisconsin. Brown, whose offices are in Madison and Waunakee, notes that in serving credit union members, “We’re here for the members’ benefit. My job is to put their needs first and foremost. Whatever product or service we put in
front of a member must be a good fit for that individual.”

Developing a financial plan with the help of a financial advisor can help members consider factors that they might otherwise overlook. The first is longevity – not just our own longevity, but that of our retirement funds. Two elements that factor into the longevity of retirement funds are inflation and taxation.

“I look at the impact of taxes as something we have to consider in almost all financial planning,” says Brown. “If we’re looking at retirement and at a fixed dollar amount, we have to look at the fact that some of the income may be taxable.” She notes, however, that these considerations can be managed and shaped within a financial plan. “While income tax liability is always going to have a role,” she says, “it doesn’t have to control you; it just needs to be taken into account in your plans, lifestyle choices, and other decisions.”

Your money, your taxesBecause Brown is not a tax advisor, she refrains from offering specific tax advice. However, she says, “as a financial advisor I can help a member understand the potential impacts of income tax on their financial plan.” She can connect a member with a tax advisor as needed, and they can work together to address those impacts.

A tax advisor can also help with near-term issues, including possible strategies that some individuals may use right up until they file tax returns in order to reduce their 2018 income tax liability.

One possible tool for reducing tax liability, either now or in the future, is an individual retirement account. Those who meet eligibility requirements may be able to reduce their taxable adjusted gross income by contributing to a conventional IRA; others may consider a Roth IRA in which contributions are made with after-tax dollars so that future withdrawals can be made without tax liability.

Brown sees the choice between conventional and Roth IRAs – weighing the advantages and disadvantages of each – as an important topic for educational discussions with her clients. “I love having this conversation with people about where they’re sitting now and where they want to receive the benefit of their IRA contributions,” she says.

Brown also seeks to dispel some of the misconceptions people have about IRAs. “I think many people are intimidated by IRAs,” she says. “They may associate IRAs with risk. But an IRA can be personalized. The ‘I’ stands for ‘Individual,’ and your IRA can be tailored to your individual risk tolerance.”

Although establishing and managing an IRA can entail many choices, a financial advisor, working with a financial plan, can help identify the many factors that lead to sound decisions. “We have so much information at our fingertips,” says Brown. That can be a good thing, but it also presents challenges. “As we’ve gotten access to more and more resources on the internet, it’s easy for people to become overwhelmed, and then they shut down,” she says. The solution? Find a trusted advisor who can help marshal and sort information to guide you in developing a plan that meets your individual needs.

Weighing The Options

“With the next tax cuts taking effect in 2018, it is very important for individuals to consult with their financial advisor and tax professional to make sure they are doing everything possible to help their tax situation not only this year, but in future years as well,” says Jeremy Marshall, a financial advisor with Investment Services at UW Credit Union.

Regarding specific strategies that could reduce tax liability, Marshall directs members to a licensed tax advisor, who can assess an individual’s personal situation. A tax advisor, for instance, can help ensure that you are taking full advantage of all the credits and deductions available to you.

At the same time, it’s important to make sure you are making full use of any benefits with tax incentives that your employer may offer. “For instance, if you have a young child in a licensed day care setting and your employer offers a Flexible Spending Account, this may be an avenue to cover some of your child care expense without paying income tax on those dollars,” Marshall says. “As always, though, you’ll want to consult with your tax professional for the particulars of your individual situation.”

To the extent that they’re able, people should take full advantage of the opportunity to participate in a retirement savings plan, Marshall says. “The tax-deferred element of a retirement savings plan helps with the compounding of growth and allows all the money saved to keep working for you, without your having to make a payout each year to cover the tax burden of investment gains and dividends,” he explains.

Each person’s situation will be different, depending on income level and deductions, he notes. Most individuals in a lower tax bracket may want to seriously consider saving their retirement assets in Roth (post tax) accounts while high income earners may still be better off using tax-deductible retirement accounts, such as a traditional 401(k). Those with moderate income may want to consider a hedge strategy that uses a combination of traditional and Roth-based retirement vehicles.

Your money, your taxesn addition to employer-based retirement plans, IRAs have long offered a way to save for retirement. People don’t always recognize that an IRA is an individual retirement plan, says Marshall, and that the individual owner can therefore select the investments within the plan. “Each IRA can look different, depending on a person’s risk tolerance, time horizon, and goals,” he says. For instance, an older person who wants to be more conservative with an IRA may be using investment vehicles such as savings accounts, CDs, fixed annuities, and bonds. A younger person with a longer time financial horizon, on the other hand, may have more stock-related investments such as stock mutual funds, ETFs (exchange-traded funds), and individual stock holdings.

Marshall notes that not all IRA rules apply to everybody in the same way. For example, your ability to deduct this year’s contribution to a conventional IRA will depend on factors such as income levels and whether you, or your spouse, are covered by a retirement plan at work. A qualified financial advisor and qualified tax professional can help determine the type of IRA that makes the most sense for your situation.

For individuals who are investing outside of retirement accounts, it’s important to be aware that such non-qualified investments can generate taxable dividends and capital gains, even if the money is not withdrawn from the portfolio. Those who are trying to minimize tax liability in a non-retirement account may want to consider using more tax-efficient investments in their portfolio, such as ETFs and municipal bonds, Marshall says. “Putting non-qualified money into an annuity is also a way to defer taxation until a future day. However, annuities are not for everybody.”

Marshall notes, too, that there are many types of annuities with a variety of features, riders and costs, so it is essential to consult with a licensed professional before considering an investment in an annuity. “It’s important for people to think not only about current conditions, but also about the future and possible legislation changes that may alter their individual tax situation,” Marshall says. The new tax law, for example, is due to sunset in 2026 for individuals and revert to 2017 levels. Furthermore, with the federal deficit rising year after year, he observes, investors would do well to consider whether future tax rates might rise to pay for the growing debt.

Financial advisors can help taxpayers understand the variety of ways that taxes can affect personal finances, including implications that are commonly overlooked or misunderstood. Professional guidance can be the key to minimizing the impact of future uncertainties through development of a resilient financial plan. —

Summit Financial Advisors are registered representatives of CUNA Brokerage Services, Inc. Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC,
a registered broker/dealer and investment advisor.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution. CBSI is under contract with the financial institution to make securities available to members. FR-2296650.1-1018.1120

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