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Part 3: Reduce

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Now it’s time to talk about taxes, not a fun subject, but if you think of reducing your tax burden like a game of chess, you can make some very clever moves. Let’s take a look at some of the tax reduction strategies we use to avoid asset erosion.

Tax Reduction Strategies

  • Contribute to tax-efficient investment accounts - These are accounts like IRAs, Roth IRAs, or employer-sponsored retirement accounts. 
  • Diversify account types - Using a combination of investment account types lets you mix and match income sources in retirement to help minimize your taxes.
  • Harvest losses to offset gains - Using any investment losses you may have to offset your investment gains each year is a technique called "tax-loss harvesting," and it can help reduce your income tax liability. 
  • Contribute to a health savings account (HSA) - If you have an eligible high-deductible medical plan, contribute to a health savings account. Contributions to these accounts offer an immediate tax deduction, grow tax-deferred, and can be withdrawn tax-free for qualified medical expenses. Any balance left at the end of the year can roll over indefinitely, similar to the assets in a retirement account.
Client Centered
  • Make charitable contributions - Charitable contributions made with payroll deductions, checks, cash, and donations of goods and clothing are all deductible. These deductions add up and are often overlooked.
  • Adjust your cost basis for capital gains - When calculating the cost basis after selling a financial asset, make sure to add in all of the reinvested dividends. That increases the cost basis and reduces your capital gain when you sell the investment.
  • Reduce your estate taxes by gifting - If an estate is large enough to trigger an estate tax, then gifting assets is one way to get around the estate tax. You can hand off portions of your estate to family members as gifts, up to a certain amount.
  • Use Irrevocable Life Insurance Trusts - Don’t forget that life insurance proceeds are usually included in your estate, which can significantly increase your estate’s value. By removing the proceeds from your estate, it can lower the risk of owing estate taxes.

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