4 Tax Tips For Growing Your Wealth by Zak Gardezy CFP®

As a portfolio manager and financial planner, you might expect that one of the top questions I receive would be about investing or stock tips. Surprisingly, it isn’t. The most common questions I get are about taxes, specifically, “How can I reduce my tax bill?” In nearly a decade in the finance industry, I’ve only met one person who wanted to pay more taxes — and trust me, I still don’t understand why. If you’re interested in learning how to legally and strategically reduce your tax bill, increase your wealth, resulting in a more successful financial future, then this article is for you.

Contribute to Your Company Retirement Plan
A 401(k) is a common retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck before taxes are taken out. The maximum 401(k) contribution limit for 2024 is $23,000, with an increased limit of $30,500 for those aged 50 and older, allowing for catch-up contributions. Contributions to company retirement plans, such as 401(k) accounts, are made pre-tax. This means you do not pay income tax on the funds contributed today, which can result in significant tax savings each year. By reducing your taxable income, these pre-tax contributions can save you thousands of dollars annually, enhancing your overall retirement savings strategy.

Contribute to a Health Savings Account (HSA)
A Health Savings Account (HSA) is a powerful savings tool, often referred to as a “Stealth IRA.” Contributions to an HSA are made pre-tax, similar to a 401(k), and create additional tax savings. For 2024, the contribution limits are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution allowed for those aged 55 and older. When you withdraw funds for qualified medical expenses, you are not assessed income tax on the withdrawals. However, if you use HSA funds for non-medical expenses before age 65, you will owe income taxes plus a 20% penalty. The HSA earns the nickname “Stealth IRA” because, after age 65, you can use the funds for any purpose without incurring the 20% penalty, although you will still be subject to income tax on non-medical withdrawals. Over time, the tax-free growth and compound interest on the contributions can add up significantly, making the HSA a valuable component of your long-term financial strategy.

Invest Tax-Efficiently
The investment industry has seen many advancements that create opportunities for more tax-efficient strategies. At Wealthstone, we analyze prospective client portfolios to determine their “tax drag.” Certain investments, such as mutual funds, can generate high annual tax bills and often come with high expense ratios, significantly harming long-term wealth accumulation. In some cases, switching to exchange-traded funds (ETFs) makes more sense due to their lower expenses and tax drag.

With rising interest rates, many investors now hold large cash pools in high-yield savings or money market accounts. However, unless these accounts are tax-deferred (e.g., IRA or 401(k)), the interest earned is subject to income tax. For instance, a 5% savings yield could net only 3.025% for someone in the highest tax bracket (Arizona resident.)

Shifting to more tax-efficient income-producing investments, like municipal bonds (which can be tax-free at both federal and state levels) or tax-efficient private real estate funds, could dramatically increase your net yield. For example, a 4% Arizona municipal bond is equivalent to a 6.61% taxable savings account or CD, making it a more advantageous investment for high-tax-bracket investors.

Efficiently managing capital gains is also crucial. This includes taking advantage of tax-loss harvesting and spreading capital gains over longer periods to minimize tax impact.

Spousal IRA
Did you know that you can contribute to an IRA for your spouse? This strategy can effectively reduce your income tax bill while also securing your spouse’s retirement. However, there are specific rules to follow. Both spouses must file taxes jointly to qualify. To receive a full tax deduction for a spousal IRA contribution, your joint modified adjusted gross income (MAGI) must be below $218,000. The deduction begins to phase out between $218,000 and $228,000, and no deduction is available if your MAGI exceeds $228,000.

For 2024, the maximum spousal IRA contribution limit is $7,000, with an additional $1,000 catch-up contribution allowed for those aged 50 or above, totaling $8,000. For an Arizona couple aged 50+ with a MAGI of $218,000, this could save you up to $2,120 in income taxes.

Effective tax planning can significantly enhance your wealth accumulation journey. As I often tell clients, designing your investment portfolio to align with your life goals, taking on the appropriate amount of risk, and rebalancing as needed are crucial market-related variables we can manage. However, we can directly control tax efficiency, retirement planning, estate planning, asset protection, and other critical aspects of a comprehensive financial plan, all of which contribute significantly to growing and preserving your wealth.

For a more comprehensive financial planning experience, please reach out to us at Wealthstone, where we expertly integrate investment management and financial planning.

Zak Gardezy CFP®
Founder & Private Wealth Advisor
(480) 973–3560
zak@wealthstonepwm.com
7014 E. Camelback Rd. Suite B100A
Scottsdale, AZ 85251

Learn More About Wealthstone:
Founded by Zak Gardezy CFP® | Scottsdale, Arizona — Wealthstone Private Wealth Management (wealthstonepwm.com)

Learn More About Zak Gardezy CFP®:
Zak Gardezy CFP® | Top Scottsdale Financial Advisor | Wealth Management Expert — Wealthstone Private Wealth Management (wealthstonepwm.com)

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