Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
Open enrollment season offers an opportunity for high-income investors who are covered by a high-deductible health care plan to set up an HSA, according to Morningstar's Christine Benz. "Employees covered by HDHPs are also allowed to contribute to a health-savings account; three tax breaks serve as an incentive to do so, and make the HSA the most tax-friendly savings wrapper in the tax code," she writes. "HSA contributions consist of pretax dollars (or they're deductible, for people who aren't using payroll deductions to fund their HSAs), any interest earned on the account is tax-free, and withdrawals for qualified health care expenses are also tax-free."
Taxpayers should take advantage of the IRS Tax Withholding Estimator to review the amount withheld from their income to cover their tax liability, writes Rob DeHollander in Upstate Business Journal. The estimator also offers options for those who want to adjust their withholding, writes the CFP, who is the managing partner and cofounder of the DeHollander & Janse Financial Group. Before using the online tool, they need to gather certain information, such as their pay stubs, most recent tax return and tax-deductible expenses.
Clients may want to make financial moves before the end of the year to minimize their tax burden, according to this article in MarketWatch. For example, they can give some appreciated stock or mutual fund to their children or grandchildren who are in the 0% bracket, as these loved ones will owe no taxes on the gains. They can also take advantage of the home sale gain exclusion, or convert traditional retirement assets into a Roth account if they expect to move to a higher tax bracket in retirement, as Roth distributions will not be subject to taxes.
Clients who have a side hustle are advised to carefully choose a business structure that protects them from failure and other risks, according to this CNBC article. They are also advised to get appropriate insurance and keep their business records organized for tax purposes. “One of the biggest tax benefits of a business is the ability to deduct certain expenses,” says Brian Ellenbecker, a senior financial planner with Baird.
The average expense ratio among the top-performers is 40 basis points higher than the average.
A 401(k) plan can be a great retirement savings vehicle, but workers should understand the downsides of contributing to this plan, according to this article in Yahoo Finance. 401(k) participants may face hefty investment fees, fewer asset classes, hidden brokerage costs and limited early withdrawal options. While 401(k) contributions are made on a pre-tax basis, distributions will be taxable and may affect taxation of Social Security benefits. Retirees also have to take RMDs from their 401(k)s when they reach 70 1/2.
