As the tax filing deadline approaches, here are some planning strategies

April 1, 2021

The tax filing deadline has been extended until May 17, so Carl Carlson, CEO and Founder of Carlson Financial, is providing tax planning insight.

He said tax planning doesn’t just involve whether to put money into a traditional IRA or a Roth IRA or how much to put into your retirement plan at work; it also involves things like Social Security claiming strategies, Roth conversions, which investments to own in which types of accounts, what types of taxable accounts to own and how much money to have in each, what type of insurance products to own and how to use them, and when it comes to itemized deductions the possible use of strategies like bunching and others.

He expanded more on tax treatments with an example. He said a 65-year-old couple that just retired may want $125,000 per year to live on. Let’s say their Social Security is $50,000 per year. If in addition to their Social Security, they take $15,000 out of savings, sell $30,000 in stocks (with a $10,000 capital gain), take $20,000 out of a Roth IRA and take $10,000 out of a traditional IRA, then they could have $125,000 in income with ZERO taxes.

And if they took the $75,000 all from a traditional IRA, Carlson said assuming a 5% state tax, they would be paying about $15,000 in taxes per year. The difference over time is that if they had $1,000,000 in investments when they retired at 65 and assuming a modest inflation rate along with the long-term stock market average return, one couple would run out of money at age 88 and the other couple that did the tax planning would still have $1.7 million and growing at age 88.

Carlson said to remember that most CPAs and accountants that are doing your taxes are mostly working on preparing all the documents to file your taxes and not all the tax planning that could have huge implications over time.

So, not only does it make sense to know, “What should I do with possible IRA contributions this year?" but more importantly, “How do I make sure what I do this year?” fits into an overall life-long tax planning strategy.