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 “Both the contributions and the earnings [are] nontaxable when withdrawn.”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.