Giesting Financial’s own Thorn Murphy recently joined Retirement News Online, an outlet that often consults experts and financial professionals to discuss topics such as retirement tax planning.
Thorn first detailed an important aspect of any annual financial plan: the differences between tax preparation and tax planning. He said:
There’s a big difference between tax preparation and tax planning. For example, tax-prep services would be provided by a CPA, and we have connections we can bring into the office to help. Tax planning, on the other hand, looks to the future as well as the present. As a wealth advisor, I provide tax-planning services to my clients, helping them make decisions regarding their retirement accounts, like choosing between a Roth IRA and a traditional IRA, which determines how their funds are distributed.
Tax preparation is an annual task to help you determine your obligation based on factors like income, capital gains and more. That service is typically provided by a CPA, or you may be able to do it yourself. While Giesting Financial has connections to CPAs we can enlist in the help of, we don’t perform on-site tax-preparation services. We do, however, help with tax planning, which is a long-term plan for your income distribution and the way your funds and gains are taxed in retirement. It’s one of our many services, and we can help you find a strategy based on your unique situation.
It’s important to know how retirement accounts are taxed, which can change based on type of account, tax regulation and new legislation. Thorn said:
Typically, most people who come into our office have a 401(k), and that’s traditionally pre-tax, so when the income is distributed, it is treated as ordinary income. Now, some companies offer the Roth option, which means the money is taxed prior to entering the account. Then, when it’s distributed, it comes out tax-free. We believe we’re in a period of low tax rates, so I tend to prefer the Roth option so that we aren’t waiting for Uncle Sam to determine tax rates down the road.
Retirement accounts like 401(k)s and IRAs can be funded with either pre-tax or post-tax dollars, giving the account holder the option of when they’d prefer to be taxed on the funds. Traditional 401(k)s are the most common, and they’re funded with pre-tax dollars, so funds will be taxed as ordinary income upon distribution. Roth accounts allow the contribution of post-tax dollars, so the money grows and is distributed tax-free, giving pre-retirees a more exact idea of their account’s value. The proper decision is completely dependent upon each person’s income level and unique circumstances. Giesting Financial can help you determine which approach fits your goals!
Next, Thorn explained the Roth conversion, a tax strategy commonly used by pre-retirees and retirees to convert tax-deferred funds to tax-free funds. He was asked whether it can be a good idea for a client, to which he responded:
It depends on a person’s tax brackets. Usually, if you’re a high-income earner and you’re trying to get a bit of a tax break, you can put your funds into a pre-tax account. If you have the flexibility to do a conversion and pay the taxes now, that’s when I would do the Roth conversion. Everybody’s situation is different, so our strategy is determined by the objectives you’re trying to accomplish, and we build that strategy around your goals.
A Roth conversion can be helpful if you have some flexibility in your annual tax obligation based on the tax bracket you currently fall into. If this is one of the highest-earning years of your career, it may not be a good idea to do a Roth conversion, as it will likely be taxed at the highest rate possible during your lifetime. A good time to do a Roth conversion can potentially be at the beginning of retirement when your taxable income will likely drop from the salary you collected during your career, but if you think you’re ready to convert your pre-tax funds to post-tax funds, Giesting Financial can help!
Thorn’s appearance closed with a quick discussion about alternative strategies clients should generally be aware of for the sake of financial literacy and understanding their own situation. Thorn said:
It all depends on a client’s current sources of income. The best way for us to tell which strategy would be most advantageous is to meet with them in the office, discuss a plan and devise a strategy that meets their objectives most efficiently.
Financial planning and strategizing is not a “one-size-fits-all” process. What works for one client may not work for another, and the processes and plans will vary from person to person. We’d always advise booking a meeting with us to discuss your current circumstances. That should give us a better understanding of your situation, how we can help and what plan we can put into place to reach your goals. If you’re ready to meet with us in our office, you can click right here!
To watch the entire video featuring Thorn Murphy on Retirement News Online, click here.
If you’re ready to take the next step with us, please give us a call. You can reach Giesting Financial in Batesville, Indiana, at 812.933.1791 or in Columbus, Indiana, at 812.565.2726.
This article is for informational purposes only and not to be construed as financial or investing advice, nor is it a replacement for real-life advice based on your unique situation.
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite #150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”). Securities are offered by Registered Representatives through Private Client Services, Member FINRA/SIPC. PCIA and Private Client Services are separate entities and are not affiliated.