Year-End Strategies to Help Reduce Tax Exposure
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The end of the year is an ideal time for both reflection and preparation. Considering the current tax environment, it’s also a great time to explore opportunities to reduce tax exposure now and implement strategies to minimize income taxes in the future. Effective tax planning generally considers ways to accelerate or defer income and deductions to produce the best overall tax result given your particular situation and objectives.
Here are some strategies to consider before this year comes to an end.
Contribute more to your retirement plan accounts.
Contributing to tax-deferred retirement vehicles — such as 401(k)s, 403(b)s or IRAs — can be one of the most effective year-end tax savings strategies.
Consider increasing your plan contributions even by a few percentage points. And if you’re over age 50, take advantage of maximizing catch-up contributions.
Fund a Roth IRA or complete a Roth IRA conversion.
Consider funding a Roth IRA or converting a traditional IRA or employer-sponsored plan to a Roth account.
Roth contributions are made with after-tax dollars, but future distributions will not be subject to income tax.
Evaluate the different distribution options for your IRAs and/or qualified plans.
Changes to Required Minimum Distribution (RMD) rules create an opportunity for you to determine how to address your RMD strategy.
At the same time, review your beneficiary designations and distribution options to make sure they’re current too.
Increase your charitable contributions.
The holidays are a popular time for giving, and if you are charitably inclined, you can reduce your tax burden with most donations.
For a charitable deduction to apply to the current year, the contribution must be made by December 31 to a 501(c)(3) tax-exempt organization that is eligible.
Fund a permanent life insurance policy or tax-deferred annuity.
Permanent life insurance offers income-tax-deferred growth of the policy’s cash value, tax-favored access to cash value and an income-tax-free death benefit.1
Tax-deferred annuities help you control the timing of income recognition.
There are many year-end tax planning decisions that can significantly improve your income tax situation. Implementation of strategies that would be most beneficial to you should engage the expertise and perspectives of your key advisors – including tax, investment and insurance professionals who work as a team to educate you about available planning options. Work with your financial professional to discuss your goals and how you might be able to take advantage of year-end strategies.
1 Accessing cash value will reduce your policy death benefit and values, may result in certain fees and charges and may require additional premium payments to maintain coverage. Ask your financial professional for details on accessing your cash value, including how it might impact the coverage guarantees and situations when the values you access could be taxable. Always consult your tax advisor before accessing a policy’s cash value.
The information in this material is for informational purposes only and is not intended as financial, tax or legal advice. Reference to the taxation of products in this material is based on Penn Mutual’s understanding of current tax laws. All guarantees are subject to the claims paying ability of the insurer. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your personal situation. Always consult your financial, legal or tax professionals.
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