The benefits of tax-efficient wealth management.
A tax-advantaged account offers certain tax benefits to encourage individuals to save or invest for specific purposes, such as retirement, education or healthcare. These accounts can help you lower your taxable income, defer taxes or avoid taxes altogether if used for qualified expenses.
Beyond tax efficiencies, tax-advantaged accounts also offer estate planning benefits, access to a variety of investment options, coverage for future medical and education expenses and potentially simpler tax reporting.
There are several tax-advantaged account options, each with its own benefits and rules:
Rules and benefits vary from account to account and depend on your tax situation as well as any future changes in tax laws. Tax-deferred retirement accounts allow you to put off paying taxes upfront, which means you have to pay at the point any money is withdrawn.
529 plans are specifically designed to help families save for future eligible education expenses, such as tuition, fees, books and certain living costs. These plans create a tax-advantaged account where you can save money earmarked for education expenses. You can contribute post-tax funds to this account, and when it comes time to cover qualifying educational costs, you won’t be obligated to pay federal taxes on the money withdrawn.
The two primary types of 529 plans:
Coverdell Education Savings Accounts (ESAs) is another education plan option that works similarly. While the money used to fund these types of accounts isn’t tax-deductible, you’ll enjoy tax savings on any money you make on your investments.
The key difference between 529 plans and Coverdell ESAs is that a Coverdell ESA has a lower annual contribution limit per beneficiary and can be used to cover a range of qualified education expenses for both college and K-12 expenses. Coverdell’s offer a more flexible investment universe, including individual securities, like stocks and bonds.
There are two main types of tax-advantage health plans:
Not only can health-related tax-advantage accounts help you cover future medical expenses, but they can also be used as a long-term and diversified savings vehicle to help you plan for the future.
Sources: synchronybank.com; experian.com; investopedia.com; americanfidelity.com; hsacentral.net;
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of Raymond James, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover education costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.