The Verus Team

Saving & Investing Wisely - Having a Tax-Free Bucket

Written by: Derek Majkowski. Any opinions are those of Derek Majkowski and not necessarily those of RJFS or Raymond James

When we conduct a planning meeting, one area of focus we like to review is the balance sheet. The assets, less the liabilities.

Not only are we identifying the gross and net numbers, we are also looking to see which assets are liquid (available in short order), illiquid (typically real estate, art, real assets), tax-deferred (most annuities and traditional retirement accounts), and tax-free.

Often the tax-free bucket either does not exist, or represents a smaller percentage of the balance sheet.

There are several reasons why most people have less in the tax-free bucket, those reasons typically include:

  • Less options - Federal and State Governments generate most of their revenue from taxes

  • Tax-Free accounts like - Roth IRAs, Education IRAs, 529s, Health Savings Accounts all originated later than other types of retirement and education savings accounts

  • Some are not aware of other tax-free tools available for investment (i.e. Tax-Free Municipal Bonds, Cash Based Life Insurance Policies)

When we conduct these reviews, we spend time not only looking at the strategies implemented with saving and investing, but also with how that is being managed on a tax efficient basis.

Tax management with investing takes on many considerations. This includes understanding the different taxes one’s funds could be subject to, as well as how assets are invested in the short and long run. In addition, the tax code and tax rates have, as we have seen over the past several decades, been moved higher and lower by both Federal and State Governments.

One way to eliminate some of the risks with tax rates being unknown and unpredictable in the future, is to begin utilizing some of the tools and products that allow income and capital, or future income and capital, to be tax-free.

To be clear, it is important to highlight that in most cases when someone is talking about tax-free. It is highly unlikely that any funds are completely tax-free. There was a tax taken somewhere. In most cases savings come as a result of having more of your income after your expenses. One of those expenses is income taxes.

When planners are looking at tax-free investment planning, it is trying to circumvent taxing the same savings more than once. The double taxation avoidance is often achieved by implementing an appropriate strategy that utilizes the tools and products available in ways to have those funds not be taxed again at a later point.

Some of the tax-free account options – like those used for education and health purposes, are designed to be only tax-free when addressing those specific goals when the funds are needed. The other products and accounts - like Roth IRAs and Roth 401ks, Tax-Free Municipal Bonds, and Cash Based Life Insurance, have other rules and considerations that provide their respective tax advantages, but are generally broader in access and utilization.

The key to all of it however, is that saving and investing is extremely important to any long-term planning. Weighing the impact of taxes today, as well as in the future, is just as important. The wisest investors and strategies usually include investments, products and accounts that make tax-management and tax-efficient investing a priority.

Like Traditional IRAs, contribution limits apply to Roth IRAs.  In addition, with a Roth IRA your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits.  Contributions to a Roth IRA are never tax deductible, but if certain conditions are met distributions will be completely income tax free.  Neither Raymond James Financial Services nor any Raymond James Financial Advisor offers tax advice and this should not be construed as tax advice.  You should discuss any tax related issues and questions directly with a tax professional, such as an accountant or certified public accountant (CPA).