10 actionable ways to cut taxes now and in the future

HOW TO CUT TAXES NOW AND IN THE FUTURE

 

If you just wrote a big check to the IRS, you may be wondering how you can prepare now to cut your taxes next April. We’ve got you covered. Luckily, there are several legal ways to reduce the amount of tax you pay each year that don’t just include adjusting your withholding.  Here are 10, practical and actionable, ways to help you cut your next tax bill and those in the future.

 

1. UTILIZE YOUR RMD FOR YOUR CHARITABLE GIVING

 

If you are 72 or older, donating your Required Minim Distribution (RMD) to a qualified charity is a great way to reduce your tax burden. These donations are considered a qualified charitable distribution (QCD) and will not be taxed up to $100,000 per account owner.

Note: The Secure Act raised the RMD age for some taxpayers to 72, but didn’t raise the QCD age from 70 1/2. 

A qualified charitable distribution can satisfy all or part of the amount of your RMD from your IRA. For example, if your required minimum distribution was $10,000, and you made a $5,000 qualified charitable distribution, you would only have to withdraw another $5,000 to satisfy your required minimum distribution.

The more you donate in this way, the more you can exclude and cut from your taxable income This is extremely helpful since RMDs are ordinary taxable income that will often push retirees into a higher tax bracket. 

Qualified charitable donations are a great way to use up your RMD if you are planning to give to charity. However, keep in mind that it must be a check sent directly from an IRA to the charity, it is not a charitable deduction per IRS rules. 

Schwab allows you to have a checkbook on your IRA that allows you to write such checks directly from your IRA. Be aware, that all donations need to be sent/cashed by 12/31 of the tax filing year. 

QCDs can offer big tax savings, as tax rates on regular income are usually the highest. Regardless of the tax benefits, designating this income for charity is a great way to begin or expand your giving and support the causes you care most about. 

 

2. TAKE ADVANTAGE OF TAX LOST HARVESTING 

 

There is always a silver lining, right? For market downturns, that silver lining is tax-loss harvesting. With tax-loss harvesting, you can use your loss to cut your tax liability and better position your portfolio going forward.

Here is how it works, in its simplest form:

  • First, sell an investment that is losing money and underperforming. 
  • Next, use that loss to reduce your taxable capital gains and potentially offset up to $3,000 of your ordinary income for the tax year. (Any amount over $3,000 can be carried forward to future tax years to offset income down the road).
  • Last, reinvest the money from the sale into a different investment that better meets your investment needs and asset-allocation strategy.

This allows you to free up cash for new investment and mitigate a tax consequence.  

As with anything tax-related, there are limitations. Please note that tax loss harvesting isn’t useful in retirement accounts because you can’t deduct the losses in a tax-deferred account. Additionally,  there are restrictions on using specific types of losses to offset certain gains. A long-term loss would first be applied to a long-term gain, and a short-term loss would be applied to a short-term gain. You also must be careful not to violate the IRS rule against buying a “substantially identical” investment within 30 days.

The best way to maximize the value of tax-loss harvesting is to incorporate it into your year-round tax planning and investing strategy. We always recommend talking to a professional about your specific situation. 

 

3.  FUND HSA OR FSA 

 

Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) allow pre-tax dollars to be set aside for medical, vision, and dental expenses, thus reducing your overall taxable income. Each has its own benefits.

An HSA is triple tax-advantaged, which means:

  • Contributions are made with pre-tax dollars 
  • It grows tax-free (you can invest your contributions and earn interest) 
  • Can be used tax-free for eligible expenses (

Another great thing about an HSA is that you can keep it forever. Funds roll over and never expire. On the other hand, an FSA is a “use or lose it” type of account. However, an FSA is still a good option because it is funded before tax and comes out tax-free. FSA are employer-sponsored so there is often less involved with enrolling and setting up the plan. As such self-employed filers are ineligible to open able to open an FSA. 

Regardless of which plan you have, both HSAs and FSAs are good options to help cut and reduce your taxable income.  

 

CONTRIBUTE TO A PRE-TAX RETIREMENT ACCOUNT TO CUT TAXES NOW

 

Contributing to a retirement plan may be one of the simplest ways to slash what you own to the IRS. Whether a 401k or an IRA, (learn the differences here), both offer tax savings. 

 

4. MAX OUT  YOUR 401K

 

If your employer offers a 401k, maximize it. To realize benefits on your next tax bill, contribute to a Traditional 401k rather than a Roth 401k. Traditional 401k contributions will reduce your taxable salary, another great way to cut your tax bill.

 

5. CONTRIBUTE TO A TRADITIONAL IRA

 

Additionally, if you are below the income limits, you can also contribute to a Traditional IRA. They are tax-deferred, meaning that you don’t have to pay tax on any interest or other gains the account earns until you withdraw the money. Contributions to a Traditional IRA are often tax-deductible. However, if you do have a 401k or any other employer-sponsored plan, your income will determine how much of your contribution you can deduct.

 

6. CONSIDER A CASH BALANCE PLAN

 

If you are a business owner or solopreneur and have a high income, consider a cash balance plan. A Cash Balance plan is a type of retirement plan that allows for a large amount of money to go in tax-deferred and grows tax-deferred. It is a great option for owners looking for larger tax deductions and accelerated retirement savings.

Cash Balance contributions are age-dependent. The older the participant is,  the higher the contribution can be. It can be an extra $60k to over $300k (based on age and income ) on top of combined 401k/ profit-sharing contributions. 

An attractive feature of a cash balance plan is that the company offering the benefit can take an above-the-line tax deduction on contributions. Above-the-line deductions are great for tax savings because they reduce income dollar for dollar.

 

CONTRIBUTE TO AN AFTER-TAX RETIREMENT ACCOUNT TO CUT TAXES IN THE FUTURE

 

While a 401k, Traditional IRA, and Cash Balance Plan can help curb taxes in the near term, we also recommend planning for future tax implications to help you cut your tax bill for years to come. Roth IRAs are retirement accounts that are made up of your AFTER-tax contributions, however, they offer tax-free growth and tax-free withdrawals. 

 

7. GROW TAX-FREE WITH A ROTH IRA 

 

Again, Roth IRA contributions are after-tax, so you can not deduct your contributions. Nevertheless, your distribution will be tax-free and penalty-free at age 59 ½  Something your future self will thank you for! Another benefit is that a Roth IRA isn’t subject to RMD requirements either. 

Your Roth IRA contribution limits are based on your filing status and income.

There are definitely some potential tax savings here, especially for those just starting out. It makes sense to pay taxes on the money you contribute now, rather than later, when your tax rate may be higher.

 

8. RUMINATE ON A  BACKDOOR ROTH

 

A Backdoor Roth allows people with high incomes to fund a Roth, despite IRS income limits, and reap its tax benefits. Could it be right for you?

In short, you open a traditional IRA, make non-deductible (taxable) contributions to it, then move that Traditional IRA into a Roth IRA and enjoy the tax-free growth. 

It is important to note that you can not have any money currently in an IRA, SIMPLE IRA, or SEP-IRA to make this work properly.  There are more complexities involved in setting this up, and we recommend talking with a CERTIFIED FINANCIAL PLANNER™.

 

9. ROTH CONVERSION

 

A Roth Conversion involves the transfer of existing retirement assets from a traditional, SEP, or SIMPLE IRA, or from a defined-contribution plan such as a 401k, into a Roth IRA.

You’ll have to pay income tax on the money you convert now (at your current tax rate), but you’ll be able to take tax-free withdrawals from the Roth account in the years to come

You can also use market downturns as an opportunity to do a Roth Conversion. If your IRA goes down in value because of market fluctuations, you could convert the account to a Roth, which allows you to pay a  smaller amount of taxes because the account is down in value. Then you’ll have the money in a Roth when the market recovers, which would then be tax-free.

While there is no predicting what the tax brackets and tax rates will be in the future, if taxes go up by the time you retire, converting a traditional IRA and taking the tax hit now rather than later could make sense in the long run.

 

10. PAY ATTENTION TO THE CALENDAR

 

Lastly, from a tax perspective, there is a big difference between December 31 and January 1st. While some things, such as IRA contributions can be made up until the filing deadline, many must be done during the tax year, like qualified charitable distribution.

It is important to plan as far in advance as possible to help minimize your taxes. We recommend meeting with a tax professional and your financial advisor throughout the year.

 

The key to lowering your tax bill is to plan ahead and cut your tax liability in a way that makes sense for you.  It’s impossible to know what regulations, changes, and updates will go into effect during any given tax season, but rest assured that we’ll be here to help you plan. Schedule a free consultation call with one of our CERTIFIED FINANCIAL PLANNER™ professionals today! 

Until then, take these tips to heart and remember that reducing your taxes isn’t an impossible task.

3 Questions to ask before making any financial decision

 

Whether it is hiring a financial advisor, picking a mutual fund, or refinancing your mortgage it is a good idea to ask a lot of questions when it comes to your money. However, if you only ask a few, here are our top 3 questions to ask before making any financial decision.

 

What is the investment philosophy?

 

Make sure to ask yourself if the investment makes sense to you. It may be great for 99% of the population but is it a fit for you and your current situation. Does it match up with your risk tolerance and timeline?  Really take the time to contemplate this.  Further, do you understand it? Or is it too complex? Understanding this will help move you forward in a meaningful way.

 

Do I trust the person giving the advice or offering the investment?

 

Simply put, what is your gut telling you about who is behind this. What is the person’s credibility and credentials? Was it your cousin Eddie spouting off a stock tip at the family reunion? Or a longtime friend and financial advisor who has been in the industry for years? It may seem like a no-brainer to ask this question, but it is sometimes easy to get caught up in the hype of the product and the potential returns.

A quick way to tell if an advisor truly has your best interest in mind is if they are CFP® (Certified Financial Planner)- learn more on that here, but in short, it means they are a true fiduciary and must have your best interest in mind regardless of commissions. Trust is so important, don’t take it lightly.

 

What is the downside risk, and can I afford it?

 

What can you stand to lose? Sure, look at what the potential of the investment is, but don’t ignore the risk. Make sure the amount you invest matches your risk tolerance. The old saying stands true here- “Don’t put all your eggs into one basket.”  Before you make an investment decision know the risks.

Short and simple, those are the top 3 questions to ask before making any financial decision!

Are you considering an investment and aren’t sure if it is right for you? Asked these questions and are still unsure? We are here to help…just give us a call.

 

4 Reasons to Hire a CFP ®

4 Reasons to Hire a CFP ®

 

Managing your finances can be difficult and time-consuming. However, finding someone to handle your finances can be just as challenging. Want a tip to make it easier? Hire A CFP ®.

People often ask us what is a CFP ®, how are they different from other financial advisors, and the reasons to hire a CFP ®. We are going to be breaking all that down for you today.

 

What Is a CFP® Professional?

 

First, it’s more than just an acronym. Unlike some designations that are worth little more than the paper they’re printed on, the CFP ® (CERTIFIED FINANCIAL PLANNER™) designation is one of the most esteemed financial certificates around.  Each CFP ® is held to an extremely high standard and requires an immense amount of work. Typically nine months to two years of study.

In the US there are only 81,109 CFPs ® and only 2,274 in the state of Colorado, according to the CFP® Board professional demographics.  The exam itself is a grueling 7-hour test that assesses the financial advisor’s ability to apply principles of financial planning. It covers all areas of insurance, investments, income taxes, retirement, estate planning, ethics and conduct, and financial plan development, among many other skills.

Beyond the test, there is so much more that goes into the certification. We have condensed it down to the top 4 Reasons to Hire a CFP®.

 

4 Reasons to Hire a CFP ®

 

  1. Fiduciary Standard
  2. Ethics Code:
  3. Fitness Standards:
  4. Experienced Life-Long Learners

 

1. Fiduciary Standard:

Currently, the SEC has NO uniform fiduciary standard that applies to all financial professionals who provide personalized investment advice. This means there is no oversight to protect consumers and clients from paying excessive commissions or receiving substandard performance. Consumers are exposed to even greater and unnecessary risks from products that may be deemed suitable (more on that here) for them but are inferior to other available options and not necessarily in their best interests.

The CFP ® Board has a Code and Fiduciary Standards that require CFP ® professionals to act in the best interest of the client at all times when providing financial advice. So, as a CFP ®, we have a legal requirement to act in your best interest, all the time. In addition to this standard, Bonfire Financial is also a Registered Investment Advisor which furthers this obligation.

 

2. Ethics Code:

All CFP ® practitioners agree to abide by a strict code of professional conduct, known as CFP ® Board’s Code of Ethics and Professional Responsibility, that sets forth ethical responsibilities to the public and clients. This ensures we act with honesty, integrity, competence, diligence, and offer services objectively.

It’s a pledge to protect the confidentiality of all client information, avoid or disclose and manage conflicts of interest and always act in the client’s best interests.

 

3. Fitness Standards:

Further, the CFP ® Board has also established specific character and fitness standards for the CFP ® certification. This ensures that an individual’s prior conduct would not reflect adversely upon the profession or the CFP ® certification marks. This helps you know that if you hire a CFP ® you won’t find out later that they have:

    • A felony conviction for theft, embezzlement, or other financially-based crimes.
    • A felony conviction for tax fraud or other tax-related crimes.
    • Revocation of a financial license (e.g. registered securities representative, broker/dealer, insurance, investment advisor).
    • A felony conviction for any degree of murder or rape.
    • A conviction for any other violent crime within the last five years.
    • A felony conviction for non-violent crimes (including perjury) within the last five years.
    • Personal or business bankruptcies.

 

4. Experienced Life-Long Learners:

CFP ® professionals are required to complete 3 years of experience related to delivering financial planning services to clients. They also must have a bachelor’s degree prior to earning the right to be a CFP ®. This real-life experience means that CFP ® professionals have practical financial planning knowledge. They can truly help you create a realistic financial plan that fits your individual needs.

Once certified, CFP ® professionals are required to maintain technical competence and fulfill ethical obligations. Every two years, they must complete a minimum of 30 hours of continuing education to stay current with developments in the financial planning profession and better serve clients.

Need more reasons to hire a CFP ®? We’d love to answer any other questions on what it means to have a CFP ® working for you, feel free to contact us.

At Bonfire Financial we pride ourselves on having a team of CERTIFIED FINANCIAL PLANNERs™.

 

4 Reasons to Hire a CFP

 

How do Financial Advisors Get Paid?

HOW DO FINANCIAL ADVISORS GET PAID?

 

Do you ever wonder how financial advisors get paid? If so you are not alone. It has been estimated that more than one in five people who have a financial advisor does not know what they are paying in advisory fees. You don’t hire a plumber or join a gym without knowing the cost. So why be in the dark about the cost of a financial advisor?

It should be simple enough…sadly, it’s not really straightforward. Understanding the compensation for financial advisors is often puzzling. It’s a perpetual source of confusion, so we are here to break it down.

Let’s first look at 3 different types of advisors you could choose to work with.

 

3 Types of Financial Advisors:

 

  1. A broker or broker-dealer
  2. Hybrid or dually registered advisor
  3. Register investment advisor

 

Broker or Broker Dealer:

 

First, if an advisor is a broker, which the majority of advisors are, they receive a commission based on the products that they sell and the investments they recommend.

The commission can be upfront (when you buy), it can be on the back end (when you sell), or it can be trailing (they get paid a portion annually).  The problem is that with most of them you “should” read the prospectus (the gigantic legal document you get when you buy or get sold a product and throw away when it arrives in the mail) to find out what you are really paying.

Moreover, there is an even bigger problem with brokers which has to do with what is in your best interest.  They only follow the “suitability” standard. This says the product or recommendation only needs to be “suitable” for the client. This suitability standard is established by the Financial Industry Regulatory Authority (FINRA) a private nongovernmental organization.

The suitability standard is problematic.

For instance, a broker could recommend a Mutual Fund that is ten times more expensive to own than a comparable Exchange Trade Fund, and that is acceptable because it’s “suitable” for the investor.  This obviously raises questions as to why a broker would prefer one investment over the other.

Many brokers push annuities as they are notorious for heavy hidden commissions, but keep in mind any investment could carry a commission. Mutual funds can carry sales loads up to 8.5% and brokers may take 1 to 2% off of a bond’s value for themselves. Think of it as a kickback.

To us, this is a huge conflict of interest and why Bonfire Financial is not a broker.

 

Dually registered or a hybrid advisor:

 

Next, let’s look at advisors that are dually registered or hybrid advisor.  There are some nuances between to a hybrid/dual-registered advisor. For the purposes of this discussion let’s focus on the fact that they are registered investment advisors AND licensed through FINRA (again, a private corporation that acts as a self-regulatory organization).

While that sounds good on the surface there are issues with this format.  As a registered investment advisor, they act as fiduciaries and do what is in the best interest of the clients. Great news, but they are also filing with FINRA to sell products as a broker. What? Yes, they can sell investment products and collect a commission.

These advisors can wear two hats with the same client. Not a good look.   They can have accounts which they are acting as fiduciaries on and then have another account with the same client in which they act as brokers and only follow the suitably standard.

In a recent research paper published by Nicole Boyson, professor of finance at Northeastern University, The Worst of Both Worlds? Dual-Registered Investment Advisers, she finds dual registrants “have numerous conflicts of interest.” These include cross-selling insurance products, revenue sharing with third-party mutual fund companies, and selling proprietary investment products. She also found dual registrants charge an average of 2.1% on assets under management. This is much higher than the 1% fee most registered investment advisers collect. On top of that, they are more likely to be the subject of disciplinary actions by securities regulators.

How can someone be a fiduciary to a client but not on all their accounts or money?  I am still scratching my head on this one.  In my opinion, a client would never really know if the recommendations were in their best interest or not! This model was a pass for Bonfire.

 

Registered Investment Advisor:

 

Finally, there is the Registered Investment Advisor (RIA). These advisors have a legal obligation to act as fiduciaries.  Meaning that they have to act in your best interest at all times. They also must register with the Securities and Exchange Commission (SEC). The SEC is a governmental agency responsible for protecting investors.

Further, a Registered Investment Advisor must explain upfront how they receive compensation. Fees range but generally average somewhere between 1-2% of the total value of the investments under management. An RIA must disclose any conflicts of interest.  RIAs usually earn their revenue through a management fee comprised of a percentage of assets held for a client. However, the most important thing to know about RIAs is that they must act as fiduciaries for their clients.

Unfortunately, few advisors that are acting full-time in this capacity, less than 13,000 total in the US, surprising, right?

 

Fee-Only Vs. Fee-Based

 

Another thing to consider in determining how financial advisors are paid is whether they are Fee-Only or Fee-Based. While the term Fee-Based may sound very similar to Fee-Only, there are important distinctions.

The Fee-Based model can be susceptible to the same conflicts of interest that the commission structure has. There are many advisors who are mostly fee-based and the majority of their revenues come from fees, yet they can offer you a mutual fund or an investment that normally has a commission, and a conflict.

Fee-Only advisors don’t sell products, don’t accept commissions and they operate as true fiduciaries. Fee-only advisors work for their clients and clients pay an hourly rate, a fixed annual retainer or a percentage of the investment assets.

 

In conclusion:

 

I have always strived to be upfront and honest with people and my clients.  At a young age, I started my career at a big wire-house and believed I was a fiduciary for my clients and that I could act in their best interest.  However, the more I was learning, the more I began to realize the cards were against me. Decisions made at the top made it difficult to truly act in the manner of a fiduciary.  I was a vegan in a butcher shop, a sheep in wolf’s clothing.

So, I made a switch and I started Bonfire Financial, a Fee-Only Registered Investment Advisor.  Now my core values are in line with the company I am with and I can be a true fiduciary all the time.

If you have any other questions on how Financial Advisors get paid, or if you are curious what category your advisor falls in, feel free to give us a call. 

Why Bonfire Financial?

The story behind the name.

 

A BONFIRE IS A FIRE OF CELEBRATION.

As I look back on my life some of the best memories and conversations have happened sitting around the fire.  I have been pumped up at a homecoming bonfire. Inspired by having deep conversations with friends about the future around the fire. I have felt close to my family on camping trips roasting marshmallows on the fire, and I have felt at peace sitting at a fire and staring at the stars.  Fire is life and all of these are moments are cherished.

 

Life is meant to be experienced.

 

That sounds good an all but I am a financial advisor and what does that have to do with financial advising?

I say everything!  Or at least it should.  Money is a vehicle to those experiences and the time to enjoy those moments.  The more money you have, the more experiences you can afford to have with your family and friends. You can give more to the causes you care about. The more peace of mind you can have.

 

I wanted to create a company that focused on that outcome, not just dollar figures.

 

Everyone has different goals and dreams and how they want to spend their life. What Bonfire Financial does is focuses on those and comes up with solutions to meet them as efficiently and as quickly as possible. My hope is that our clients will enjoy even more moments sitting around the proverbial bonfire celebrating their lives.

In the many years I have spent in the financial industry I have seen that most financial companies only focus on the bottom line. They priorities their shareholders’ value.  This means that the decisions made about the company are not necessarily about how to add more value to the client. They are often about how to improve the share price.  A good share price is nice but it comes at the expense of the client, and the employees of the company.

 

So why is Bonfire Financial different?

 

We created Bonfire Financial as a fee only registered investment advisory firm (RIA) so that we could be true fiduciaries to our clients. Further, all of our advisors are CERTIFIED FINANCIAL PLANNERs™  As such, we must do what’s in the best interest of our clients at all times.  In effect, putting our client first, which is where we think they should be. We have a belief that if we add more value to our clients than anyone else, not only will they be happy, the company will thrive.

So, as a constant reminder of these philosophies we came up with a name that reminds us to focus on the client’s outcome everyday so that hopefully soon we will all be sitting around the fire celebrating!

All the best,

Brian

President & CEO | Bonfire Financial

 

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