Can You Avoid Taxes?
Read Time / 2 Minutes
Theme / Financial Planning
“You can’t get a motorcycle.”
The words every 20 year old dreads to hear. My girlfriend and I had just broken up, and I was looking for a reasonable adventure. Yes, a motorcycle was exactly what I needed to bring some color back into my life. My landlords during college kindly suggested I toss that death contraption idea in the trash. Claiming it was in my best financial interest, they threatened my rent status would change from subsidized to unsubsidized. Oh right, did I fail to mention my landlords were also my parents?
Is there a more effective way to fan someone’s desire into a flame than by saying these four magic words?
“you can’t do that!”
I think not. The inverse seems also true. “Death and taxes,” according to Benjamin Franklin are the only two things certain in this world and yet, humanity does everything its power to escape them both. We don’t like being told what we can’t do NOR what we HAVE to do.
We are complex and so are taxes. The only sure fire way to avoid what some consider to be legal theft is to buy an island and live by yourself. Yet, there are things we can consider in our investment strategies to minimize future tax liabilities:
Roth IRAs. This is one of the more popular strategies implemented to avoid future taxes. Unlike its relative — the Traditional IRA — which gives its contributors their tax benefit today, the Roth IRA offers tax free growth and distributions in the future for qualified purposes.
Roth Conversions. This is a process of moving Traditional IRA savings to Roth — keeping your future self a safe distance from Uncle Sam. Also, with the rise of many employer sponsored plans offering Roth, you may be able to replicate this process within your plan. But, be weary, the cost of conversion is that the amount transferred will be viewed as earned income and taxed accordingly. Though the tax bill will vary, the price may be well worth it knowing you’ve visited Uncle Sam now instead of later.
HSAs. They seem to be the least used in the investment strategy world for after tax savings. In order to have access to a HSA (Health Savings Account), you must have a high deductible health plan. Containing dual benefits of the Traditional and Roth IRA, HSA contributions are tax deductible and the growth tax-free if distributions are used for qualified medical purposes. It’s the unicorn of tax qualified accounts.
Note: Roth IRAs have various income and contribution limits; it’s important to confirm one is eligible before making contributions. Roth Conversions have potential tax consequence; it would be wise to consult a tax professional before engaging in conversions. HSAs have contribution limits and eligibility is based off health plans; it’s important to check with your health insurance provider to see if you qualify.
Life is mostly give and take (both/and) — rarely one or the other (either/or). My parents told me not to get a motorcycle. I kindly ignored their advice and purchased a Honda CBR (bumble bee color). Taxes may indeed be avoided. The cost is simply finding a location with no government. As seductive as that sounds, a location with no government poses challenges — similar to the challenge of staying alive while owning a motorcycle. Certain retirement accounts allow you to avoid taxes now, which very likely means you will pay taxes later. Before making big decisions, it’s wise to prayerfully consider the total cost — how things are going to affect you now and later.
Ryan De Amicis
Wealth Advisor
408.758.6413
ryan@christianwm.com
