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Piggy Bank illustration by Heather Skovlund for 360 Magazine

Future Fax Filing Tips

Tips for Tax Filing in the Future

Tax time is near, and soon everyone will be rushing to get their taxes filed. Last year, Americans were met with quite a few delays in getting their refunds with the onset of the pandemic.

If you have a refund coming, the sooner you file, the sooner that refund will make its way into your bank account.

If you’re like most tax filers, you probably want to do everything you can to reduce your overall tax bill. We know that taxes are needed to run the government, but there’s no need for you as an individual to pay more than you need to.

Here are a few areas to consider or understand for future tax filing years:

  • Funding tax-preferenced accounts. One way to save on taxes is by putting money in various tax-preferenced savings accounts such as an IRA, a 401(k), and others. Depending on the account type, you can deduct your contribution each year, defer paying taxes on growth or take withdrawals tax-free. In health savings accounts (HSA), you can do all three. There are eligibility requirements you need to meet. An HSA can only be used for medical expenses.  With a traditional IRA, you don’t pay taxes on your contributions, and you defer taxes on the account’s growth. You do pay taxes on withdrawals you make in retirement. A Roth IRA has different advantages. You can’t deduct your contributions now, but your money grows tax-free, and you aren’t taxed when you make withdrawals.
  • Using a 529 for K-12 private or college education. Many people are familiar with 529 plans, but they often think of these solely to save for a college education fund. But a 529 can also be used to pay for a private school in elementary and high school. The significant tax advantage with a 529 is that you don’t pay federal income taxes on the account’s growth. However, you must spend the money on qualified educational expenses and nothing else. This is essential to remember and understand because if you use the money for other reasons, you will pay taxes on that withdrawal, and you will also pay the penalty. A 529 account is something to consider if you have children or grandchildren and want a tax-efficient way to save for K-12 or college education.
  • Making charitable donations. Charitable donations are a great tool for reducing your tax bill. They come with the bonus of allowing you to make a positive impact in your community. Through charitable donations, you can reduce your income tax, capital gains tax, and estate tax. Some people view this most straightforwardly – you choose an organization that qualifies under the tax rules to donate to. There are other ways to contribute as well: You can establish a donor-advised fund, which is a personal charitable account opened in the name of the donors and held by a nonprofit organization. For example, let’s say you sell a stock and, instead of paying the capital gains tax, you choose to place the proceeds in a donor-advised fund. You can claim the total amount as a charitable deduction, although you don’t have to donate the money in one lump sum. The money remains in the fund and can be donated in small amounts over a period of years while drawing interest.

These are just a few things you can consider as you look for ways to reduce your tax bill. Your financial professional will be able to help you work your way through the process and find what works best for you and your situation.

Has COVID Clouded Your Retirement Picture? 3 Tips To Plan Clearly

Some people planning for retirement may do most of the right things in terms of saving and investing. But they don’t have a crystal ball and cannot foresee exactly how much money they will need in their non-working years – or for how long.

That uncertainty – magnified by the financial effects of COVID-19 – is one reason why it’s important to always keep the distant future in mind when planning and to consider all options that address those potential needs, says John Smallwood, president of Smallwood Wealth Management and author of It’s Your Wealth – Keep It: The Definitive Guide to Growing, Protecting, Enjoying, and Passing On Your Wealth.

“Too often, people are siloed in their view of their financial plan rather than focusing on the big picture,” Smallwood says. “Sometimes, it’s because they believe in a pitch that one magic product or investment is going to save their retirement.

“The pandemic causes some people to look for fast solutions, but there is no magic wand that you can wave and save your financial plan. The ‘magic’ that is going to help you is to put multiple products and multiple strategies together in an integrated way that is unique to you.”

Smallwood says those either starting or reevaluating a financial plan should consider these points:

  • Avoid cookie-cutter solutions. Because every person’s circumstances are different, a one-size-fits-all approach in financial planning doesn’t make sense for the future retiree, Smallwood says. “Whether it’s a mutual fund, insurance policy, annuity, a stock option, 401(k), or something else, the truth is that banking entirely on a single product or type of investment is setting you up for financial failure,” Smallwood says. “There are always popular products being pushed, but cookie-cutter solutions don’t take into account that every client has different financial pressures. Single products are often focused tightly on rate of return, but they don’t look at everything that’s happening in a person’s life or at erosion principles, which are actually taking away more wealth than is being accumulated in many cases.”
  • Know how to minimize market volatility. Smallwood says having measurable goals and a realistic view are important to success with a financial strategy. And part of that strategy includes understanding and minimizing the impact of market volatility on your money. “One way to make a sense of it all is to know the difference between average rate of return, sequence of returns, and actual return,” he says. “Average rate of return is over the life of an investment. Sequence of returns is the order in which your investments provide you with a return. Actual return is the actual amount of money gained or lost during a quarter or year compared to the initial value of an investment.”
  • Don’t get caught up in chasing returns. “Financial success does not come from chasing returns or selecting a magic product or asset class,” Smallwood says. “It comes from having a balanced plan, and then stress-testing that plan for weak areas to see how taxes, feeds, inflation, medical expenses, market volatility, college expenses and other variables can impact wealth potential. People who chase returns typically buy an asset class, or they buy a fund based on its past performance. If it doesn’t do well, they sell it, and they buy the next hot-performing fund. That’s how they fall into the trap that keeps eroding their wealth.”

“To be successful with your retirement plan,” Smallwood says, “you need to keep an open mind, understand your uniqueness, and not follow the crowd in terms of what are the right solutions for you.”

About John L. Smallwood, CFP®

John L. Smallwood is a senior wealth advisor (www.johnlsmallwood.com) and president of Smallwood Wealth Management and affiliated companies, providing investment consulting and financial plan design for corporate executives, entrepreneurs, and professionals. He is the author of It’s Your Wealth – Keep It: The Definitive Guide To Growing, Protecting, Enjoying, And Passing On Your Wealth, and a previous book, Five Ways Your Wealth is Under Attack.