It’s tax season once again and many of us will be scrambling to get things wrapped up by April 18.

Once completed, you may be ready to focus on something different, but chances are your financial advisor is still keeping an eye on your tax situation. That’s because, unlike tax preparers who can help with tax filing and deductions during tax season, holistic financial advisors monitor the impact of taxes on their clients’ portfolios all year long.

Because taxes and investments go hand in hand, fiduciary advisors often assist clients with strategies at each life stage to help minimize taxes and stay on track to achieve their financial goals.

How does tax planning work?

Investopedia defines tax planning as the analysis of a financial situation or plan to ensure that all elements work together to allow an individual to pay the lowest taxes possible. Financial advisors incorporate tax planning to help clients reduce their tax liability so they can invest as much as possible for the future.

Your advisor’s recommended tax planning strategies may differ depending on where you are in your journey toward your financial goals. Your financial advisor considers things like the timing of your income and purchases, your future expenses, and the types of investments or retirement plans you have, when developing strategies for your situation.

Before retirement

While you’re working, your tax planning strategy may include investing in a tax-deferred retirement plan that reduces your taxable income. This can be effective if you have a high income now but anticipate potentially being in a lower tax bracket in retirement. Younger adults may find it effective to invest in a Roth IRA, which uses after-tax dollars, for a couple of reasons: For example, you may be in a lower tax bracket now than you will be in retirement. Also, Roth IRAs enable the account holder to withdraw contributions anytime without taxes or penalties, which may come in handy if you need the money sooner.

Another popular option for high-income earners involves making “backdoor” Roth IRA contributions. In this situation, the taxpayer contributes to a traditional IRA account first and converts the contribution to a Roth IRA. This enables an individual to bypass IRS income limits and grow the converted assets tax-free; however, income tax will be due on the conversion right away, as well as on any investment gains. This strategy may be useful for those who anticipate an increase in tax rates. (Right now, some tax cuts made under the 2017 Tax Cuts and Jobs Act are scheduled to sunset on Jan. 1, 2026.)

After retirement

Tax planning is also important as you withdraw your assets in retirement. To make sure you stay in a beneficial tax bracket, your advisor may prioritize which assets you should tap first, help you navigate your tax rates for Medicare and Social Security, plan for long-term care, or transfer your required minimum distributions (RMDs) to your favorite charity to help reduce your taxes.

Once you retire, your advisor may also consider altering your investment strategy to minimize taxes further, reduce risk as needed, and help you maximize your nest egg for the long term.

Other ways advisors may help

In addition to helping you devise a tax-efficient investment strategy, or manage withdrawals in retirement, financial advisors often help clients understand the tax implications of the decisions they make. For example, if you decide to sell stock to help fund a major purchase, your advisor can help you determine how much in capital gains tax you might owe. If you have underperforming investments, your advisor can help you with tax-loss harvesting — a tactic used to help offset any capital gains as you rebalance your portfolio.

Finally, tax planning is important, not just to benefit you during your lifetime, but also to benefit your heirs. Financial advisors often work with estate planning attorneys to help clients structure tax-favorable wealth transfer strategies, with the goal of enabling clients to leave more assets to their children or a charitable organization.

Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments and/or investment strategies recommended and/or undertaken by Savant, or any non-investment related services, will be profitable, equal any historical performance levels, be suitable for your portfolio or individual situation, or prove successful. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement. Please see our Important Disclosures.

Chris Ruedi is a financial adviser with Savant Wealth Management, Bloomington.

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