Generally attributed to Benjamin Franklin, one quote that still rings true today is that “…in this world nothing can be said to be certain, except death and taxes.” And perhaps because that thought is more than a little bit depressing, the certainty of having to pay taxes only seems relevant to most people when it’s time to file. But when people neglect to plan for taxes over the course of their lifetimes, they end up facing another, also depressing certainty: paying more than necessary.
Taking the time and effort to plan for taxes saves you money in the short term, long term, and can make all the difference for your retirement and legacy.
Making a tax plan at the beginning of the year can help lower your tax bill by ensuring that you are taking advantage of as many tax strategies as possible. The best way to make sure that you haven’t missed anything is by going over your tax situation and strategies with an accountant or advisor.
Most people do not make enough money in a single year to fund their long-term goals, like paying for their children’s college, purchasing a house, or paying off all of their student loan debt. Therefore, some long-term tax planning is in order. For example, the money you put away in a tax-advantaged 529 account for college education grows tax-free and can be withdrawn tax-free when used to pay educational expenses. Overall, the more you save on taxes, the more you have to put toward your financial goals.
As you plan for your retirement and continue to contribute to your 401(k) plan or IRA, it is helpful to know that the amount you contribute can be deducted from your taxes. Even if you utilize a Roth IRA and cannot deduct the contributions today, you can access those funds tax free in retirement. It takes a lot of money and careful planning to retire comfortably, and a tax plan is an essential part of the process.
When you think about what you hope to leave behind for your heirs or your favorite charity, you might not initially consider the tax ramifications. Consider setting up part of your estate plan in a Roth IRA so your children can draw tax-free income from the account. You can also take advantage of the annual gift tax exclusion by transferring funds to your heirs while you are still alive. Donor-advised funds, life insurance, and various types of trusts can all offer other solutions to the tax aspect of your legacy.