Tax Planning in Action

As a planner, I hate speculation. I would much rather plan for what I can control, and harvest the fruits without surprise.

And that’s exactly what we do with our clients — at least with those who are smart enough to take us up on it — we PLAN for the upcoming tax season so there are no nasty surprises come tax time, and for many even, a few nice little perks.

Last week, we discussed the various steps you can take to prepare in advance for tax season, and to consider making decisions NOW that can affect how your tax return actually turns out.

Because sure — it’s nice to be “prepared” so that the tax preparation process is easy. But it’s even NICER to be able to be proactive about saving yourself from having to pay too much tax.

As it is often said, there really are two different tax codes in this country: one for those who don’t bother to have someone help them use it, and another for those who take advantage of every legal, ethical and available deduction to help them save.

Tax planning can (and should) impact many financial decisions. Like how you might consider funding various kinds of retirement accounts — and how different tax implications should be considered as you do.

Along those lines today, I’d like to give you just one small example of how you can be utilizing the “other” tax code to avoid having to pay unnecessary taxes on your hard-earned assets.

Dennis Bridges’

“Real World” Personal Strategy Note

One Example of Simple Tax Planning

“What we know is a drop, what we don’t know is an ocean.” – Isaac Newton

Too many folks wait until the winter before they look at their tax obligations. Even worse, too many even among our clients wait until that season before they speak with us in any kind of proactive way.

That’s a problem, and it could be costing you some serious savings.

Here’s an example:

Let’s say that you were considering taking money out of a pension (401k) to finance the down payment on a house.  It’s quite a common maneuver. But let’s say next that you do this withOUT discussing it ahead of time with a professional. That could be a four (or five) figure mistake.

If you were to come into our offices before such a move, I would ask you a few easy, but very important questions, and then (depending on the answer) likely advise you to first roll the money ($10,000) into a Traditional IRA.  You could then withdraw the money at a savings of $1,000.00. This is because money used for a first home, up to $10,000, is penalty-free when taken from an IRA, but NOT a 401K.

Would you be pleased by that move? I’d guess “yes”, especially if you knew about some other local folks I know of, who failed to plan. This couple just learned of the $41,000.00 penalty they had to pay for doing the same thing, but from their 401k.

Ouch.

Other “penalty-free” withdrawal opportunities (I should note here: these are NOT “tax-free”, but penalty-free):

* Unreimbursed medical bills — The government will allow investors to withdraw money from their qualified retirement plan to pay for unreimbursed deductible medical expenses that exceed 10 percent of adjusted gross income. (401k or IRA)

* Total and permanent disability (401k or IRA)

* Health insurance premiums after 12 weeks of unemployment (IRA only)

* Death (401k or IRA)

* Higher education costs (IRA only)

There are a few other obscure situations available, but again — these decisions are best made under consultation.