Your Savings, Investments, & Taxes

TAXES. Love or hate them, if you live in the United States of America, you can participate in our excellent tax system. At Whitaker-Myers Wealth Managers, we strive to provide the best advice and individualized financial plans to help reduce your tax burden and be a good steward of the resources God has given you! As financial advisors, we work closely with our amazing Certified Public Accountant (CPA), Kage Rush. Whether your assets and resources are so numerous that you pay people to protect your properties or you are just trying to figure out the basics of the investing world, we can help. This article will cover three basic investment strategies that can help alleviate your tax burden now or in the future. Hopefully, it will give you a basic understanding of the tax benefits of some of the accounts we set up and manage on behalf of our clients.

Individual Retirement Arrangements (IRA)

IRAs are savings that can provide fantastic tax advantages for people in the current tax year or retirement age. There are, however, two types of IRAs that savers must be cognizant of; the traditional and the Roth.

Traditional IRA

This type of account provides an immediate tax advantage. The money is deposited into the account before it is taxed. The benefit of the immediate tax savings comes from this pre-taxed deposit. For example, if your salary is $50,000 annually, and you contribute $5,000 to your IRA annually, you can deduct that $5,000 from your Federal and State income taxes. You would be in the 12% tax bracket, saving about $600 in income tax. Even though this is an immediate tax-saving benefit, the caveat with this situation comes at retirement when you pay taxes on withdrawals from the account. Withdraws from the traditional IRA can typically only be made after 59.5 years old without facing any penalties unless an exception applies. One potential issue with the Traditional IRA distributions is that it increases the chances of your social security income being subject to income tax in retirement. This can lead to a surprise tax bill early in retirement without proper planning.

Roth IRA

The Roth IRA is similar to the traditional IRA as a retirement savings account, and withdrawals can typically only be made after 59.5; however, this account does not save on taxes immediately. With the Roth IRA, deposits would be made AFTER the money deposited has already been taxed. Although this type of account does not provide any tax advantages to individuals for the current tax year, after the taxed contribution is made, it can grow free from tax to help save for your retirement. For example, if your income is $50,000 annually, and you contribute $5,000, you do not have immediate tax benefits. The benefit comes when you turn 59.5 years old and start withdrawing from that account. Upon the retirement age mentioned above, the taxed money you had previously contributed is now withdrawn from the account, free from tax. Another benefit is that this lessens the impact of your social security being subject to income tax in retirement.

Limitations

Two limitations to the traditional and Roth IRA are worth mentioning. First, the funds that can be contributed to either type of IRA annually are restricted. The maximum yearly contribution for 2023 is $6,500/year for those under 50 and $7,500/year for those 50 or older. Second, if you withdraw earnings from your accounts before 59.5 years of age, you can owe income taxes and have a 10% penalty. To recap, both the traditional and Roth IRA are great ways to save for retirement that can help with amazing tax saving benefits now or in the future.

Where you are in your financial journey would determine which account would be a good fit for you. Remember that these accounts are limited to the max yearly contribution, so often, the IRAs are not the sole retirement savings account. They are used in conjunction with other types of retirement and Brokerage accounts.

Brokerage Accounts

Another type of account we often assist clients in managing is a Brokerage account, or Bridge account, as Dave Ramsey calls it. In all reality, Dave’s is a much better name because who wants the word BROKE associated with their wealth? With a Brokerage/Bridge account, no immediate tax deductions or tax deferral benefits exist. However, it does offer some intermediate benefits:

• You have access to the funds whenever you need them

• You can get market returns rather than having your money sitting in a savings account at a bank, earning a whopping .01% rate of return.

• Tax loss harvesting. This is when your advisor trades your investments at a loss and waits at least 30 days to buy a similar investment. This loss can be deducted from future Capital Gains or can be deducted at $3,000 a year on your taxes.

• Also note that Brokerage Accounts create taxable dividends and interest every year depending on the investments chosen in the account.

• No Capital Gains taxes if your annual income is under $89,250 for Married Filing Jointly, $55,800 for filing Head of Household, and $41,675 for Single or Married Filing Separately.

Ultimately, when a person enters retirement, having capital in all three of these investment areas is beneficial to maximize the tax advantages.

As of the current tax year (2023), the standard deduction is $27,700.

From a tax perspective – The least taxed retirement cash flow to the most taxed retirement cash flow is ranked below:

• Only claiming Social Security income and taking money out of a Roth IRA or Roth 401(K)

• Mixing Social Security income with cash from a brokerage account, Traditional IRA distributions, and Roth IRA distributions

• Claiming Social Security Income and using Traditional IRA distributions. Remember that Traditional IRA distributions are initially tax-free when contributed but are taxed as earned income when withdrawn in retirement, which can make up to 85% of Social Security taxable.

If you were to withdraw $100,000 a year, the Federal Tax breakdown would look like this:

• $50,000 from Traditional IRA - $27,700 is tax-free from the standard deduction, and $22,300 is subject to the 10% tax rate = $2,230

• $39,250 from Brokerage Account – Not the full $39,250 is subject to capital gain tax, just the gain, which is the difference between the stock value of $39,250 and when the stock was originally purchased.

• $10,750 from Roth IRA

The tax liability for a couple married filing jointly from the cash flow would come from:

• the Traditional IRA distributions above the applicable standard deduction claimed,

• any short-term capital gains recognized and long-term capital gains above the 0% tax rate threshold,

• any interest and dividends received from the brokerage account,

• and potentially any taxable income from Social Security because of earned income from the Traditional IRA distributions and size of capital gains recognized.

*Taxes may vary from the example depending on your specific tax situation and filing status.

We Are Here to Help

Investing has many benefits, so knowing how and where to place your money is key. This is why working with a financial advisor is beneficial so that they can help you think through the strategies that would work best for your specific financial goals. Contact any member of our financial advisor team today to help you get started!

Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Whitaker-Myers Wealth Managers is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.