What is a Financial advisor?
Hiring a financial advisor is crucial in many ways when it comes to managing your finances. Advisors can help you plan for your future by assessing your financial situation, distributing your money into different assets, and building your wealth over time. Planning and investing in your future is one of the best ways to ensure stability over time and maintain peace of mind. Not only is an advisor capable of managing your finances, but they are also knowledgeable about taxes and the various ways you can reduce the amount of taxes you pay. TruNroth is a good example of a financial company with dedicated financial advisors like Matthew J. Dixon, RFC, who has the knowledge and experience of helping dozens of clients achieve their financial goals.
With that being said, here are 6 ways financial advisors can help you reduce taxes:
Tax-loss harvesting is the process of selling investments that have lost value in order to offset capital gains and reduce your tax bill. For example, if you have realized a capital gain from the sale of a stock, you can sell an investment that has lost value to offset that gain and reduce your tax liability. A financial advisor can help you identify opportunities for tax-loss harvesting and implement a strategy to take advantage of these opportunities.
A financial advisor can recommend investments that are tax-free or tax-deferred, such as municipal bonds or a Roth IRA. Municipal bonds are issued by state and local governments and are generally exempt from federal income tax. A Roth IRA is a retirement account that allows you to contribute after-tax money and withdraw the funds tax-free in retirement. By investing in tax-free or tax-deferred instruments, you can reduce your current tax burden and potentially save more for the future.
Tax-Efficient Asset Allocation
Asset allocation is the process of dividing your investments among different asset classes, like bonds, stocks, and cash. A financial advisor can help you allocate your assets in a tax-efficient manner to maximize the tax benefits of your investments. For example, they may recommend placing tax-inefficient investments, such as high-yield bonds, in tax-deferred accounts like a 401(k) or traditional IRA while placing tax-efficient investments, such as index funds, in taxable accounts.
A financial advisor can help you make charitable donations in a tax-efficient way, such as by donating appreciated securities rather than cash. When you donate appreciated securities that you have held for more than one year, you can claim a charitable deduction for the full market cost of the securities and avoid paying capital gains tax on the appreciation. This can be a more tax-efficient way to make charitable donations than simply writing a check.
Tax-Free Retirement Income
A financial advisor can help you structure your retirement income in a way that minimizes taxes. For example, they may recommend using a Roth 401(k) or Roth IRA, which allows you to contribute after-tax money and withdraw the funds tax-free in retirement. By contrast, traditional 401(k)s and traditional IRAs allow you to contribute pre-tax money, but you will owe taxes on the funds when you withdraw them in retirement.
A financial advisor can help you plan your estate in a way that minimizes taxes. For example, they may recommend using a charitable trust, which allows you to donate assets to a charity and receive a tax deduction while also providing income to your beneficiaries. They may also recommend transferring assets to your beneficiaries through gifting or using trusts, which can help reduce the size of your estate and minimize estate taxes.