If your wealthy clients are thinking of tax planning for the end of the year, they have a lot of options if they want to put extra cash to work. But some ideas are better than others.

The turmoil in the stock market should make some of those decisions easier, says Bruce Primeau, a CPA and president of Summit Wealth Advocates in Prior Lake, Minn.

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 says.

“We feel it’s a great time to buy stocks on sale and put some cash to work,” Primeau says. If clients can’t contribute, he says he’s even encouraging wealthy parents to contribute to Roths on their children’s behalf.

“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,” says Brian Stoner, a CPA in Burbank, Calif. “Both the contributions and the earnings [are] nontaxable when withdrawn.”

There are also now good fixed-income investment opportunities, thanks to the Fed’s raising of rates to combat inflation. Morris Armstrong, an enrolled agent and RIA at Armstrong Financial Strategies in Cheshire, Conn., likes tax-advantaged Treasury bills, which he says are subject to federal taxes but exempt from state taxes. While they aren’t liquid, you don’t have to pay commissions on them, he says.

Armstrong also recommends some floating-rate Treasury ETFs and short-duration muni bond funds, though he warns that duration affects these investments’ sensitivity to rate increases. He also points 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 says.

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

There are other places as well to put your cash for tax advantages:

• A health savings account (HSA) allows for tax-deferred and tax-free earnings on eligible spending. The pretax contributions you make to these accounts are tax deductible, the 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 a client to put aside up to $5,000 pretax 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 the client’s home who is incapable of self-care.

• Charitable donations can be a form of tax-free investing. Clients can save on capital gains by donating appreciated stocks via a few different vehicles, and the donation also offers a deduction when the client itemizes. (This break does come with conditions and restrictions.)

• Clients can also benefit from a 1031 exchange, in which a client sells one investment (often real estate) and uses the profit to buy a similar one, deferring capital gains in the process. There are limitations on which investments can be exchanged and strict time limits for the replacement, among other conditions. This exchange survived a recent change in the tax laws.

Stoner says there are ways to generate tax-free income by using investments in rental real estate. The client makes the investment “either owning property or being a partner in a real estate partnership that generates passive losses.” These are then 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 says. “Cash flow from both investment types will be mostly, if not all, free of taxes.”

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

“For those in the upper tax brackets,” he says, “it’s important to be cognizant of federal and state income taxes when approaching how their portfolio is invested.”