If you’re earning a higher income, you’re well aware of the hefty income taxes that come along with it. It’s an aspect of your financial life that can bring extra pressure, demanding careful planning, professional guidance, and advice to manage this expense more effectively.

As wealth managers in St. Louis, MO, the team at Trinity Wealth Advisors provides accomplished individuals like you with sophisticated tax planning strategies so you can retain more of your hard-earned income and wealth.  

Taxes are a form of erosion. It takes an expert tax strategy to significantly reduce your tax liabilities and preserve more of your wealth for future use during retirement. 

In our blog, we’ll look at various tax planning strategies for high-income earners. 

Understanding the Importance of Tax Planning in St. Louis

Think of tax planning this way: Every dollar you pay in taxes is one less dollar you will have available for your future use. Taxes also create risk because only the 1% know they will never run out of money later in life. 

Tax planning is a critical service that can help you pursue a comfortable, prosperous retirement while reducing your risk of running out of money late in life.  

A sophisticated plan can help reduce taxes on current income, interest, dividends, and capital gains taxes. Following are just a few strategies we recommend to our high-income earning clients.  

Tax Planning Strategy #1 Asset Location

The following are some general thoughts and an example of how various asset types might be used in different account types to reduce taxes. Every client is different, so your situation should be reviewed individually and not be based solely on generalities.

When appropriate, utilize growth assets such as stocks and mutual funds in Roth IRAs or Roth 401(k)s. This takes advantage of the Roth because earnings and qualified withdrawals are tax-free within a Roth. The tax savings on this appreciation and income can be substantial over time. Stocks can also be utilized in taxable accounts where their appreciation can be gifted to charity or sold with gains taxed at capital gains rates instead of income tax rates.   

Another key investment planning tool is a distribution account for monthly withdrawals of lifestyle spending. Accounts like this should be extremely low-risk holding cash and conservative bonds with sufficient assets to last 12-24 months of distributions.

Sample scenario of investor, Bob, with a 401(k) and a Personal brokerage account:  

• In his 401(k), Bob opts for bonds that would be taxed at his marginal rate. By utilizing bonds in his 401(k), he can defer taxes until retirement, at which point he may drop into a lower tax bracket. 
• Meanwhile, in his taxable brokerage account, Bob focuses on stocks, aiming for capital appreciation. Stocks held for over a year can benefit from lower long-term capital gains taxes, making them a smarter choice for taxable accounts.

By matching his investments with the impact of taxes on his various types of accounts, Bob can reduce his immediate tax liabilities and boost his investment returns net of taxes.

Tax Planning Strategy #2: Leveraging Health Savings Accounts (HSAs)

HSAs offer an optimal triple tax advantage if you are enrolled in a high-deductible health care plan. You can contribute pre-tax dollars, which lowers your taxable income. Your investments in the HSA can grow tax-free. All withdrawals for qualified medical expenses are also tax-free.  

It’s important to note that HSA funds must be used for qualified medical expenses to maintain their tax status. This strategy is a straightforward way to reduce your overall tax burden while setting aside funds for health-related costs in the future.

Here’s how the tax benefit works. If you’re in a 25% tax bracket and contribute $3,000 to your HSA, this contribution could lower your taxable income by the same amount. As a result, you might save $750 in taxes ($3,000 contribution x 25% tax rate). 

The great benefit of HSA contributions is that you can roll the funds over year after year, even if you change jobs. After age 65, you can withdraw funds for any purpose, taxed as income, potentially at a lower rate.

Tax Planning Strategy #3: Retirement Accounts for the Self-Employed

If you’re self-employed, consider establishing a Solo 401(k), SIMPLE IRA or a SEP IRA. All three plans offer tax-deferred growth, but the other plan features can vary.  

Solo 401(k) provides a loan option and Roth contributions. SEP IRAs are straightforward to establish and allow for significant contributions. SIMPLE plans support up to 100 employees. Both Solo 401(k) and SIMPLE IRA let you contribute as both employer and employee. The maximum contribution amount varies by plan type.  

When deciding between the three types, consider factors like your business structure, contribution goals, and whether you value simplicity or the potential for higher contributions. Additional features like loans and Roth options can also be a determining factor.

Any of these three plans can be an excellent way to boost retirement savings while lowering taxable income. 

Your Financial Advocates

At Trinity Wealth Advisors, with over 100 years of combined experience in wealth management, we are dedicated to providing personalized advice that makes sense for you and your loved ones. We’re here to simplify your financial life, allowing you to focus more on what matters most.

Here’s what you can expect when you work with us:

1. We listen to you. We engage in deep, meaningful conversations with you to help bring clarity and balance to your financial circumstances, concerns, and goals.

2. Let us handle the financial day-to-day oversight of your wealth. Imagine your finances as a business, and consider us your dedicated CFO, overseeing the everyday management of your financial affairs.

3. Consistent, straightforward communication. Our job is to keep you in the loop with regular updates so you know what’s happening with your finances and the reasons behind it. We won’t use technical jargon, either. 

4. Think of us as your financial quarterback. We work hand in hand with your other professional advisors (like your CPA, attorney, and insurance agent) to streamline your advice and avoid conflicting opinions that may create duplicate fees.

Ready to learn more about our advanced tax planning services?  Connect with us for an introductory call.