Episode 6: 4 Tax Strategies As We Approach Year End


4 Tax Strategies to consider before the year ends

4 Tax Strategies As We Approach Year End


Kevin Lao  00:12

Hello, everybody, and welcome to the Planning for Retirement Podcast. My name is Kevin Lao. I am your host. I’m also the Director of Financial Strategies at my firm. Imagine Financial Security. We provide Financial Planning Services for those all over the US remotely, and also in Florida locally. If you’re interested to learn more about my firm, you can go to my website imaginedfinancialsecurity.com and very excited to bring this episode today on 4 Tax Strategies as we approach the year end.


Just a quick disclosure, this is not tax advice or, investment advice. So, please consult your own attorney, financial planner or, CPA to see what strategy is most relevant for you. But I do want to hit on these topics today. As we approach the year end, not all of them have to be done by the year end, some do. But some we have until April of next year before tax time.


So just wanted to bring these up as many of you are thinking about the holidays and spending time with family. We are thinking about how to save our clients and taxes? So, without further ado, I’m going to introduce the four concepts we’re going to discuss today and we will dive in.

The Four Tax Strategies to Consider Before the End of the Year

So, first one is Maximizing Retirement Contributions. Second is Health Savings Account contributions or, HSA contributions. Third is Tax Loss Harvesting and fourth will be broken into two sections. The first is Charitable Donations using a Donor Advised Fund and then 4B would be Charitable Donations using a Qualified Charitable Distribution, also known as a QCD.

Max out retirement contributions!

So, why don’t we start with Retirement Contributions? This is an obvious one. So things like 401K’s, 403B’s, 457B plans, even regular IRAs or, Roth IRAs, taking advantage of the maximum contribution or, the maximum you can contribute to these plans. I bring this up because I can’t tell you how many times I talked to folks that say yes, I’m maxing my 401 K plan.


I look at their pay stub and I look at their year-to-date contributions. And they are maxing the amount of their employer will match. Which oftentimes might be 3% or, 6% but they’re not maximizing their contribution, which for 2021 is 19,500 if you’re under 50. If you’re 50 or older, you can put in a catch-up contribution of 6500 for a total of $26,000 per year.


Yes, we’re in December, we’ve got probably two pay periods left to make contributions. You might have a year-end bonus. So, those are opportunities, you can essentially try to backload those contributions into your 401K or, 403B plan or, 457 plan to try to get either at the max contribution or, close to the max contribution, ok.



Now, if you don’t have a year and bonus, if you’re just getting your buy weekly pay-checks. Let’s say you’ve got some money sitting in savings, not really earning a lot of interest, maybe 0.01% interest. You might want to consider, hey, live on that savings for a month, ok. And instead of getting your pay-check deposit into your bank account, try to contribute either all or, most of your pay-check into those retirement plans.


So try to backload and try to get closer to that maximum contribution, ok. It might be painful from a cash flow standpoint, but you’re going to take advantage of utilizing that savings, that’s not doing anything for you, and getting in into those retirement plans that are growing tax advantage, ok, don’t just think Tax Strategies being Tax Deductions.


If you have Roth options like Roth 401K’s or, Roth 403 B’s or, if you can qualify for a Roth IRA, strongly consider that. I think we’ve been trained to deferred taxes and I see many people run into what I call the Tax Trap in Retirement. They turned 72. They have all this money saved in their qualified retirement plans and they’re having to take all these distributions out, even though they don’t need it for income.


Therefore, pushing them in a higher Tax Bracket maybe paying more for Medicare premiums so, strongly consider. Does it make sense for you to use a Traditional Retirement Plan or, a Roth Retirement Plan or, a combination thereof?


No one says you have to do 100% of one versus the other. You can use combinations of both to essentially create some tax diversification on your balance sheet. But the key is, try to get as much money as you can, before you’re in on those 401K, 403B plans and then prior to April filing taxes for next year. You leverage those traditional IRA contributions or, Roth contributions, ok.

Max out HSA contributions!

All right, HSAs or, Health Savings Accounts probably, one of my favorite tools to utilize for retirement planning, and actually just wrote a blog, post on this today actually, and so if you want to read that and to learn more details about HSAs and how to utilize them? You can go to my website imaginefinancialsecurity.com and go to my blog.


Let me just explain what an HSA is briefly? And HSA is essentially an account that you’re eligible for. If you use a high Deductible Health plan, ok, so High Deductible Health plan, essentially your Deductible is going to be a little bit higher than a regular Health Care plan, ok, but you can contribute to an HSA. And you can contribute $3,600 If you’re an individual and 2021 or, 7200.


If you’re in a Family plan, and you could recognize a tax deduction for those contributions so, in my opinion, for many people, if you’re using one of these high Deductible Plans, and you’re relatively healthy, that tax deduction that you can take advantage of by contributing to an HSA. Oftentimes either washes or, put you in a more Beneficial Tax Situation than having a lower deductible.



Obviously, you can’t predict Health Care costs. You might be paying a little bit more out of pocket in that year. But the true benefit is, you’re getting this money into this account. You’re getting the Tax Deduction for these contributions. What you can do is, you could reimburse yourself for Health Care costs. Either that you recognize throughout the year or, in future years, ok,


The growth on these assets, which you can invest in a basket of securities, like ETFs or, Mutual Funds, the growth on those assets are tax-free and the distributions are tax-free as long as you’re using it for Qualified Health Care expenses. Now, the definition of Qualified Health Care expenses is quite broad. Just do a Google search and you’ll see IRS resources, and other HSA resources in terms of what constitutes as a Qualified Health Care expense. It’s very broad. So, even dealt dental vision, routine check-ups, and surgeries.


So, the true power in these vehicles, in my opinion is, yes, you get the tax deduction today. You can use it to reimburse yourself today. But the true benefit is, if you can let that money compound long-term, ok. Particularly, to let that continue, to grow for Retirement Planning, maybe, you’re letting this thing compound for 10 years of contributions here, and you’re investing it in a well-diversified strategy and you’re growing those assets over time tax free.


You can build up a substantial nest egg to utilize in retirement, to help pay for health care expenses which is estimated in todays until 2021, a 65 year old couple is going to spend $300,000 in retirement on health care costs,


Why not spend it from tax-free buckets as opposed to— let’s say, a traditional 401K or, a traditional IRA, and you have to pay taxes on those distributions, ok. The best part about this is there’s no income phase out. Unlike other traditional IRAs or, Roth IRAs, there’s no phase out for income. So, you can get that deduction and contribute to it regardless, of what that adjusted gross income is?


Just a quick side note, a little bit different than an FSA. Many people have FSA or, flexible spending accounts available. FSA is needed to be emptied by the end of the year. So, just a quick side note, if you have an FSA, make sure you’re taking advantage of those distributions and reimbursing yourself for any healthcare expenses or, go to the doctor and do some things that you were putting off, and take advantage of those dollars in the FSA that you haven’t spent yet, ok.

Tax Loss Harvesting

We talked Retirement Contributions. We talked about HSA contributions. Now, let’s talk about Tax Loss Harvesting. It’s a somewhat complex concept, but let me try to simplify it. When you invest in a security whether it’s a Stock Bond, Mutual Fund and ETF, and these are outside of a retirement account, ok.


So, Retirement Accounts, you get the benefits of tax deferral, and if you sell anything in those, you’re not going to trigger any taxes unless you take a distribution, ok. A non-retirement account or, a non-qualified account, you could still buy those securities individually or, jointly hold them in that account, and you will either have a gain or, a loss, but you’re not going to pay any taxes until you sell that investment.


Unless there’s interest or, dividends that kick off. You’ll get a 1099 each and every year but from a capital gain or, loss standpoint, once you sell something, then you recognize that gain or, loss, ok. Let’s say you invested $10,000 and now it’s your investment is $20,000. Let’s say you sold that investment and you held that instrument more than a year. You would pay a long-term capital gain.



If you held it less than a year you would pay a short-term capital gain. Short-term capital gains you’re taxed at your regular income bracket. Whereas a capital gain you’re either in 0%, 15% or, 20% capital gains bracket depending on what your income is. But generally speaking, you’re probably in a lower tax bracket with your long-term capital gains, than you are with your regular ordinary income.


Ok, there’s definitely a benefit of utilizing these instruments outside of retirement accounts because they’re liquid. You don’t have to wait till you’re 59 and a half and to tap into those dollars. Allows you for more contributions over and above those Max contribution accounts on your 401K or, IRAs, ok.


So, throughout the year, you might have experienced some assets that grew in value, but you also might experience some assets that lost in value if you have a well-diversified portfolio. Not everything is going up at the same rate, and some might be non-correlated to one another. If you have losses in your portfolio, you might consider actually, selling that investment at a loss to take advantage of that for tax purposes.


What you do with that loss? Let’s say, you had a $10,000 loss on a different investment and you sold it, and then you had a $10,000 gain on another investment that you sold, that would essentially wash out that that gain, and you would not have any taxes due. Now, let’s say you didn’t have any gains and you just sold something at a loss that $10,000 where you can recognize up to $3,000 as a tax deduction today, and then carry forward the rest of those that loss in future tax returns.


Ok, and in order to maintain that same exposure, and that and that investment, let’s say that investment made sense for your long-term goals. So, you wanted them to continue that exposure, you might consider selling that one, and replacing it with not the same one, but something that’s very similar has similar exposure into maybe a sector or, an area of the market that you want exposure to base on your financial plan.


It’s a great strategy to take advantage of not even just at the year end, but throughout the year. Markets aren’t just volatile in December. They’re volatile throughout the year. In times, like in the third quarter when the Delta variant first rear to ted or, now it’s the Omicron, there’s sell-offs in the market in different areas, and we’re constantly looking for opportunities, for clients that have taxable accounts, to actually recognize some of those losses for tax purposes, to either offset gains or, reduce taxable income and carry forward any losses in the future as well.



Again, make sure you’re talking with a professional this one. There’s a little bit complexity to different rules around, what a wash sale might be? So, you really got to consult with your financial planner or, advisors before you make any decisions with your investment portfolio.

Charitable Donations!

Ok, fourth and final strategy, Charitable Donations. This is the time of year to be charitable, and so many people are thinking about the causes that are important to them. But they also might be thinking, hey, I want to donate to these causes but I also want to recognize some tax benefits. So, I’m breaking this down into two parts.


First would be Donor Advised Funds, and then the second is going to be Qualified Charitable Distribution. Donor advised fund, what is a Donor Advised Fund? It’s essentially an account that you can contribute to most financial institutions offer these and you can contribute really, any dollar amount or, even contributed securities into a Donor Advised Fund. It’s essentially a charity. Ok, that can then benefit as many charities as you’d like.


So, if you had, let’s say, a few $1,000 sitting around, you could either donate it directly to charity or, you could donate it to a Donor Advised Fund, and actually, invest those dollars in a basket of securities for future growth, and either donate to charity or, charities that year or, in years, in the future.


Here’s why this is beneficial from a tax standpoint is. Yes, if you had $10,000 you could donate it directly to charity or, you could donate it to a Donor Advised Fund. It doesn’t make a difference. However, if you are taking a standard deduction, which for 2021, if you’re single, it’s 12,550. If you’re married it’s 25,100.


If you donate to charity, and that donation does not put you above the standard deduction, meaning you’re not itemizing your deductions, that doesn’t really do anything for you from a tax standpoint. You’re not actually getting a tax deduction for it, because you already had the standard deduction that everybody else takes advantage of, ok. That takes the standard deduction.

Donor Advised Fund (DAF)

So, the Donor Advised Fund essentially allows you to front load contributions into this Donor Advised Fund to take a tax deduction now, and contribute to that charity or, charities in the future. Ok, so let me explain how that would work?


Let’s say you normally contribute $5,000 each year, but 5000 hours doesn’t put you above the standard deduction limits, so therefore, you’re not taking it. You’re actually not technically taking a deduction for it. What you might do is say, hey, you know what? I’m going to do this for the next decade.


Ok, I’m charitably minded. I’ve got some cash sitting around maybe, you sold a business or, a property or, you had a great year and you had a great income year, and you’re sitting in some savings. Maybe you take $50,000, which is 10 donations over the course of 10 years of 5000 hours per year, 50,000 and put it into the Donor Advised Fund.



That will for sure put you over this standard deduction limit, right, give you that tax deduction today, ok. Allow you to essentially either turn around or, write a check for $5000 to that one charity, you’re going to donate to this year, and then the remaining 45,000, you can invest and actually have future growth.


Ok, if you obviously invest wisely, there’s no guarantee of future growth. But you could have future growth on that account, to even give more than $45,000 into the future to that charity or, charities. It’s also not limited to one charity. Like I said, the Donor Advised Fund can benefit as many charities as you’d like, as long as it’s a qualified 501 C3. You can’t gift to like a private foundation or, your grandchildren’s college education.


It’s got to go to a Qualified Charity, but essentially creates a lot of flexibility and allowing you to really front load those donations in a tax year. You might want to get that deduction, when normally wouldn’t have received that deduction, but also allows you to maintain control so you can give to that charity over a period of time, and actually, still invest those dollars and maintain control of those dollars for charitable purposes.


Now, I say control, technically, it’s an irrevocable contribution. You can’t say, hey, you know what, just kidding. I want to take it back and use it for buying a boat. You can’t do that. It’s got to be Charitable Fund. It’s got to go to Qualified 501 C3 organizations and if it does, you get Tax-Free Growth and Tax-Free Distributions on that Donor Advised Fund, ok.


A great tool to utilize, if you charitably minded, you’ve got some cash sitting around. Maybe you’re in a tax year or, you want to get a deduction but just writing a check to one charity is not going to move the needle for your itemized deduction purposes. So, consider the Donor Advised Fund.

Qualified Charitable Distribution (QCD)

Second strategy, Qualified Charitable Distribution. This is for those that are 72 or, older and your RMD age are Required Minimum Distribution age. So, for those of you that don’t know, when you turn 72, the IRS says, hey, you have to take a certain percentage, out of all your qualified plans. Your IRA’s, 401K’s, 403B’s, 457s, really anything that’s not a Roth IRA, it pretty much has a required minimum distribution.


Well, let’s say that $10,000 doesn’t similar example as the Donor Advised Fund. Let’s say it didn’t put them over or, doesn’t put them over that standard deduction limit. So, donating $10,000 is not going to itemize their deductions. Therefore, that 10,000 is not going to move the needle to reduce their taxable income.


So, the nice thing about the Qualified Charitable Distribution is you can donate up to 100% or, $100,000, of your Required Minimum Distribution, if you donate it directly to charity. Ok, so let’s use the example, someone is charitably minded, let’s say normally, they have to take $50,000 out for the Required Minimum Distribution, but they normally give $10,000 to charity.



Well, if it’s coming from a Qualified Charitable Distribution, instead of taking that $50,000, for your RMD, you say, hey, go to your financial institution. Say, hey, you know what? Give me $40,000 and then the other 10,000 that I need to satisfy for this year. Donate that directly to a charity or, charities. You can name as many as you’d like.


So essentially, what that does, it satisfies your Required Minimum Distribution but that amount that you donate to charity is not included in your adjusted gross income. So, it’s essentially better than taking a tax deduction, because it doesn’t push you into a potentially a higher tax bracket and potentially could even save— it might even keep you on a lower Medicare premium schedule, ok.


It doesn’t matter if you itemize your deductions or, take the standard deduction, you would have had to take that $50,000 that Require Minimum Distribution regardless, and if you’re charitably minded, donate it directly from your IRA. And again, it has to come from a traditional IRA. It can’t come from a 401K plan or, a 403b. So, if you have this goal, you might even consider, if you’re eligible to roll those funds into a traditional IRA, and then turn around and do that QCD or, Qualified Charitable Distribution. Again, that has to be done before calendar year end.


So hopefully, this was helpful. Again, we talked about Retirement Contributions. We talked about HSAs. We talked about Tax Loss Harvesting. We talked about Charitable Donations via the Donor Advised Fund, as well as the Qualified Charitable Distribution. I hope everyone found this helpful. If you have any questions or, if you if you’re curious about, how to work with my firm again?


Go to my website imaginefinancialsecurity.com. There’s plenty of information there and how to get in touch with us. But again, hope you found it helpful. And subscribe to us if you like what you heard. Give us a five star review, if you like what you heard, and I always like to hear your feedback. Until next time, and hope everyone has a wonderful holiday season. Take care.



Kevin Lao

I am the founder of Imagine Financial Security. We are a Flat Fee, Fiduciary Financial Advisor based in Jacksonville, FL. We specialize in retirement planning for blended families, tax optimization and investment management. We can work with you locally in Jacksonville or St Augustine, as well as virtually anywhere in the United States.