3 Income Tax Blunders to Avoid

Ready To Retire!

Tax season is fast approaching, so it’s time to ensure your finances are in order.

In this episode, I address the common confusion between taxable and tax-deferred accounts as well as 3 income tax blunders you definitely want to avoid.

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Episode Summary:

Tax-deferred Account: Refers to a 401k, IRA, or a simple IRA. A tax-deferred account is where you get a deduction from your current paycheck or income tax. You get a deduction now and later when you take the money out. The total amount you withdraw from the account then becomes taxable, and it is taxed at your rate of ordinary income at the time.

Taxable Account: This refers to the savings that you put aside after your net paycheck, so there's no current deduction in these taxable accounts when you go to make a withdrawal. There aren’t necessarily any tax consequences. When you take money out of a taxable account, the only tax consequences are if you have to sell something or sell an investment you had a gain on, and then the gain is taxed as a capital gain.

3 Common Income Tax Blunders:

1-Overweighting the Tax-Deferred Account: In an effort to reduce our current income, we put way too much of our total savings into the tax-deferred account. The problem becomes when we retire or when we want to make a large purchase, all the money is not available.

2-Corporate Stock Options: Different kinds of stocks have different tax consequences. Make sure you understand the tax consequences of exercising your corporate stock options before you do it.

3-Not Selling an Investment to Avoid Paying Taxes: We are so averse to paying taxes that we would almost rather see the market value of something go down than pay taxes on a gain. We have a loss aversion bias; we're afraid of paying the taxes, we're afraid of selling and paying the taxes, but we also fear missing out.

3 Strategies if your Investment Experiences a Gain

1-Tax Gain Harvesting: When you take a position that you've made a lot of money in and sell a portion of it.

2-Make a Charitable Tax Donation: If you donate your gain to charity, you'll get to deduct a hundred percent of that, depending on your situation, but you'll get to deduct the market value, and you will not have to recognize income tax.

3-Trailing Stop Loss: A protective measure that says as long as the stock continues to go up, I will continue to own it, but if it goes down by a certain percentage, then that will trigger a sell order.

Planning is key to ensuring you’re not making a mess of your taxes or retirement. I always recommend speaking to a CPA or financial advisor to help you as much as possible.

In this episode, you’ll also hear:

● Clarification between taxable accounts vs. tax-deferred accounts

● Avoiding 3 common income tax mistakes

● 3 strategies to consider if you have a large gain and don’t want to sell

Must-listen moments:

[00:05:36] Sometimes, when we say the word taxable and tax-deferred, it might feel like tax-deferred is better because not paying taxes now sounds better than something called taxable.

[00:12:41] The key to that one is to know what your really large, significant purchases in retirement are going to be and start to plan where that money's gonna come from.

[00:27:29] It's very easy to buy a stock, to buy an investment, it is really hard to know when to sell. I really like the idea of these trailing stop losses because it creates a strategy around this…it protects us from losing a significant amount on the downside.

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Professional Journey- As the President and a CERTIFIED FINANCIAL PLANNER™ professional at TruNorth Wealth Management, LLC, I've found my calling in helping pre-retirees confidently navigate the crucial decision of retirement. Our team is dedicated to guiding family-oriented couples from being net savers to net spenders. We invite you to join our extended family and experience the TruNorth Wealth difference.

Danette Lowe, CFP®

Founder – Wealth Advisor

TruNorth Wealth Management, LLC

123 W. Nye Lane, Suite 520, Carson City, NV 89706

Connect with Danette @ https://linktr.ee/trunorthwealth

This podcast is for informational purposes only. The situations used herein do not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted for your specific situation. Neither Commonwealth Financial Network nor your representative provides tax advice.

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.