Behavioral Finance: The Key to Your Financial Independence

When planning for retirement, you need to look at multiple sources of income and be sure that some of the income sources are tax-free. The more, the better. So, how do you plan for a retirement income stream that minimizes overall taxation?

Four Instruments that Provide tax-free Retirement Income

Here are four great ways to provide yourself with tax-free.

1. Roth IRA is a great retirement investment that can result in a steady stream of tax-free retirement income as long as they are considered qualified. However, you must qualify for an IRA and the requirements are adjusted year by year as is the amount eligible for savings. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

If you do qualify, money put into a Roth IRA is taxed when you receive it, so it is not taxed again when it is withdrawn. In 2018, the eligibility requirements are:

1. Single or head of household, earning less than $120,000 to fully contribute to a Roth IRA.
2. Married filing jointly or a qualified widow(er) earning less than $189,000 to fully contribute to a Roth IRA.
3. Married filing separately earning less than $10,000 to fully contribute to a Roth IRA. (Note that those married but filing separately can use the limits for single people as long as they have not lived with their spouse in the past year)
4. Municipal Bonds and Funds provide income distributions not taxable by the federal government though they are may be subject to state income tax. Because they are not subject to federal income tax, interest paid on these bonds is typically less than taxable bonds.

There is no income limit to investing in tax-free municipal bonds and funds.

3. Health Savings Accounts (HSAs) are available if your employer offers health insurance using an HSA. Combined contributions by the employer and employee to this account as of 2018 can be as high as $6,900.00 for qualifying plans.

Following the rules about which expenses are reimbursable, no taxes are paid on withdrawals.

In addition, the HSA funds and earnings can be held until retirement then uses to provide tax-free income by reimbursing the holder for past and current allowable expenses which include Medicare premiums.

4. Roth 401(k) or 403(b) allow Roth contributions inside these accounts making those contributions and their subsequent retirement earnings, tax-free. These accounts are not subject to income eligibility limits but they are subject to taxes in the year that contributions are made.

Making the Most of Your Home

Another way to make a smart investment for your retirement is to pay off any mortgage that you have on your home before you retire which allows you to live in your home for the cost of property taxes and home insurance alone.

For many retirees, this is a huge reduction in their monthly expenses allowing the money be used elsewhere.

Some people believe that one of the most frustrating words in the financial world is the word “taxes”. But it doesn’t have to be…and it actually shouldn’t be. Understanding the world of taxation takes enormous amounts of education, understanding and application. The average person doesn’t necessarily want to become an expert on taxes, but they certainly don’t want to pay more than they have to, either. Hence the reason many people and businesses reach out for help. Finding a tax professional can be complicated; hoping to find the right kind of tax professional for the services needed tends to be the number one challenge.

When starting a search to find the right tax professional, there are basically two major things to consider. Firstly, it’s important to understand the differences between the types of tax professionals. Secondly, it’s important to ask the right kind of questions to help discern if a working relationship with a particular tax professional is a good fit.

Start with having a basic understanding of a few different types of tax professionals.

TYPES OF TAX PROFESSIONALS:

Tax Preparer – A tax preparer can help individuals, families, and businesses prepare tax returns. They cannot represent clients during an audit. Their role is limited to tax preparation. A large percentage of the general population might find that a Tax Preparer is a match for their filing needs.

EA – An Enrolled Agent (EA) has passed an IRS examination that puts them in a position to not only help clients prepare tax returns, but they can also represent their clients in the event of an audit. Generally speaking, EA’s may tend to have more thorough knowledge and understanding in regards to tax preparation than that of a Tax Preparer. Individuals, families, and business owners might find that an EA is helpful due to the complexities that their tax preparation needs may entail.

Tax Attorneys – Tax Attorneys can not only prepare tax filings, but they can also represent their clients during an audit, as well as represent clients in court proceedings. Tax attorneys play a significant role in helping their clients through complications with tax liabilities, responsibilities, and other issues that may arise.

CPA – Certified Public Accountants are tax professionals who have a degree in accounting or a related field. They have passed the state CPA exam, and are able to perform a myriad of services for their clients. They can prepare tax filings, represent clients during audits, prepare and certify audit statements. They cannot, however, represent their clients in court.

There are additional types of tax professionals, but the above mentioned tend to be the most widely sought after by individuals, families, business owners, non-profit entities, and others.

Secondly, it’s important to ask questions that are relevant for finding a professional that might be best suited for the specific needs at hand. Here are a few questions to consider when interviewing a tax professional:

QUESTIONS TO ASK:

1. What is your designation, or professional title?
2. What industries or types of clients do you have?
3. How many years of experience do you have?
4. How many people do you have in your organization, and what are their roles?
5. Do you help clients with tax planning strategies, as well as tax preparation?
6. Do you work in collaboration with financial planners and other professionals?
7. What kind of ongoing service model do you have?
8. What is your fee structure?

When discerning which tax professional to work with, having a basic knowledge of the types of tax professionals might go a long way with helping to build a productive relationship, and subsequently, possibly more favorable tax solutions. Taxes are a major part of life, and having a strategy around how finances are built, managed, and maintained could possibly help significantly. It’s important to be responsible with taxes, and having a professional that can help discern taxation with efficiencies could have significant importance to overall financial planning.