Active vs. passive vs. discretionary investing: What strategy is best?
Think of all the different investment strategies you’ve heard about throughout the years. Remember the Turtle Traders in the 1980s? What about the...
4 min read
Chris McAlpin
:
May 23, 2024 6:52:15 AM
Let’s be honest. When we dig into a discussion about what the best tax reduction strategies are, we could be here all day. That question is as broad as the sky is wide. However, I do understand that if you’re an investor, an entrepreneur or business owner, or you’re a high-income earner, this question is important to you.
You pay more than most people in taxes, and you’re looking for ways to strategically reduce your tax burden. That’s exactly what we’re going to dig into with you today.
If you’re already a retiree (or you’re looking to retire soon), I know this question is attractive to you, as well. While we are planning on speaking to those of you in the pre-retirement or retirement category in another article later on, I would still encourage you to read through this article, as it will still be very helpful to you.
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Now, before we proceed, I want you to keep in mind one very important point. The suggestions we are about to discuss will be high level. You'll have to do your own research, or you'll have to schedule a time to talk to us about what these tax reduction strategies can mean for you.
We're happy to do that research with you, and work with your tax professional to weave these strategies into your financial plan. This should not be surprising, however, because the practical application of any of the suggestions that follow to your specific situation will require a one-on-one conversation.
Maybe your taxes flow through your business personally and you pay a ton in taxes more than you really receive an income. Or perhaps you have that type of business where it seems like everything's double taxed. Ouch. I know that this hurts. I'm there specifically, and I know the feeling all too well.
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What type of business that you own matters. Do you have a sole proprietorship, an LLC, an S-Corp, or some other form of pass through entity? As these taxes pass through the company to you and you're paying taxes on the company's revenue, not necessarily on your income, you get hammered by the IRS.
So, how do you reduce these personal taxes?
Simple IRAs, 401(k), IRAs — all those can be very valuable. The traditional cap is $23,000 for 401(k), plus another $7,000 if you're age 50 or older. But a solo 401(k), that's where it can be very interesting and advantageous to you.
If you're self-employed and you don't employ others, you can own a separate business so that you could qualify for that. You can open up a solo 401(k) and invest $69,000 or more in the year 2024 pre-tax. Deferring those taxes to a future date.
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Simply put, you transfer your money from your IRA to a Roth IRA. You pay taxes in the middle. And the key component is why would you do that? It's because you are lowering your future tax burden by getting the money out of the IRA in an advantageous way into a Roth IRA.
Own tax efficient investments such as municipal bonds, real estate, opportunity zone investments and alternatives like solar projects. Our team can source these for you. It's very important that you work with somebody in this area that knows what you're doing in sourcing those investments.
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This, again, also makes it easy to weave these investments into your financial plan, so that you know why it fits you well, or if it fits you well at all within your business itself. You have a ton of legal levers to pull to lower your taxes, but that is a conversation for a different day — and it must include your tax professional.
Now, let’s talk to you high-income earning professionals out there who have carved out an impressive career as a W-2 employee of an organization. Although your financial and tax liability picture is somewhat different due to how you earn your living, you have something in common with your business owner peers — you also pay a ton in taxes and it hurts.
Do you have fewer tax efficiency levers to pull? Sure, but that doesn’t mean you don’t have options when it comes to tax reduction strategies. So, let’s talk about it.
Of course, again, we’re going to encourage you to max out your retirement plans, like we suggested for business owners. But what that looks like for you is somewhat different. Simple IRAs are also a great way to lower your adjusted gross income, which is how your owed taxes are calculated. And a Roth IRA will not lower your taxes today, but it will or could help you in future. So, a backdoor IRA may also be a good idea for you.
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Real estate can be very tax advantageous. Be an angel investor, own a business, start a small business. You can have a lot of leverage in the pool because you own the business or tax efficient securities like municipal bonds.
Let’s start with opportunity zones, because they've been around for a while. They were super impactful a number of years ago. People got very excited about them. I remember many years ago, back when they were new, this was something that was brought up a lot.
They used to be strong, and they can still be OK today. However, many of these opportunity zones are running out of runway, and they're not as attractive as they once were. But there are some new ones that have been around a while and tested, so they're still very attractive.
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Solar projects and short-term rentals or some of the latest, strongest investments that we've seen to receive deep tax credits. And again, do your homework, buyer beware. You want to know that you're still investing in a quality investment, not just getting a bunch of tax breaks.
While I certainly hope this provided you with some inspiration and direction of what tax reduction strategies may work for you, remember your next step is to have a conversation with a financial professional, whether that’s with us or someone else. Which strategies truly may work for you — and what others we may not have mentioned here could work for you — can only be determined by looking at your specific circumstances, within the context of your overall financial goals.
Schedule a time to talk, so we can work with you (and your tax planning professional) to develop the perfect plan for you. We know you have something you want to accomplish, and that excites us. We’re here for you, and we want to encourage you to get after it with the best tax planning strategy possible.
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