Clients have a lot of options to put extra cash to work, but some avenues are better than other for wealthy clients’ tax planning as the calendar year ends.

“For those in the upper tax brackets, it’s important to be cognizant of federal and state income taxes when approaching how their portfolio is invested,” said Bruce Primeau, a CPA and president of Summit Wealth Advocates in Prior Lake, Minn.

An unstable stock market clarifies some tax-advantaged moves with cash clear. Primeau recommends backdoor Roth IRA contributions. “If those wealthy clients haven’t already made their backdoor Roth IRA contributions for 2022, they should consider making them now with the global equity markets down 25% to 30% year to date,” he said.

“If their kids aren’t contributing to a Roth IRA, we’re encouraging their wealthy parents [or grandparents] to contribute to them on their behalf. We feel it’s a great time to buy stocks on sale and put some cash to work,” Primeau said.

“Roth IRAs and certain 401(k)s that have a Roth component allow contributions that are not immediately deductible but will allow tax-free income in the future during retirement,” said Brian Stoner, a CPA in Burbank, Calif. “Both the contributions and the earnings [are] nontaxable when withdrawn.”

The Fed’s raising of rates to combat inflation also influences good investments. Morris Armstrong, enrolled agent and RIA at Armstrong Financial Strategies in Cheshire, Conn., likes tax-advantaged Treasury bills. “Exempt for state tax but subject to federal,” he said. “They are not liquid ... but are sold without commissions.”

Armstrong also recommended some floating rate treasury ETFs and some short-duration muni bond funds, stipulating that duration impacts these investments’ sensitivity to rate increases. He also pointed out that some money market accounts and 12-month CDs, such as those of Vio Bank, pay 2.6% to 3%, “and they’ve been quick to raise rates,” he said.

“There are some options, depending on how you want to structure the interest-rate risk,” Armstrong added. “Pick your time horizon.”

Other tax advantaged places to put cash include the following:

• A health savings account (HSA) allows for tax-deferred and tax-free earnings on eligible spending. Pre-tax contributions are tax deductible, interest earned is tax-deferred and qualified withdrawals are tax-free. HSAs don’t expire but they are limited to holders of high-deductible insurance plans.

• An employer-sponsored Dependent Care FSA allows putting aside up to $5,000 pre-tax for such childcare costs as daycare, preschool, before/after school care, summer day camps and nanny expenses, as well as adult care for an older child, spouse or relative living in your home who is incapable of self-care.

• Charitable donations can be a form of tax-free investing. Donating appreciated stocks via a few different vehicles can save on capital gains and, if you itemize, provide a deduction when itemizing your taxes. This break does come with conditions and restrictions.

• A 1031 exchange, which survived recent changes in tax laws, involves selling one investment (often real estate) and using the profit to buy a with a similar one, deferring capital gains. There are limitations on which investments can be exchanged and strict time limits for the replacement, among other conditions.

Stoner pointed out ways to generate income tax-free by using investments in rental real estate by “either owning property or being a partner in a real estate partnership that generates passive losses" that can be offset by other investments whose sole purpose is to generate passive income.

“Cash distributions from the net of the rental real estate can be offset by depreciation on the property, creating losses, which are offset by the passive income-generating partnerships,” Stoner said. “Cash flow from both investment types will be mostly, if not all, free of taxes.”

These tax-minded investing plans remain good for 2023, Primeau added, “assuming the global equity markets are still trading at or about current levels.”