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Tax Strategies for High Net Worth Individuals

Investing in qualified opportunity zones is a smart choice.

These clients typically have between $1 million and $5 million in liquid assets. Being proactive and assisting them to take advantage of opportunities is an excellent value for financial advisors.

High net worth gives clients more opportunities, but it also requires more planning when it comes to investing, paying taxes, and planning for the future. In 2022, a single person may leave up to $12.06 million to heirs without incurring federal inheritance taxes, and a married couple may leave up to $24.12 million.

Even if a client’s net worth is under the federal estate tax exemption limits, financial advisors can help their high-net-worth clients minimize taxes by planning ahead and employing certain strategies throughout the year. The following are some examples of tactics financial advisors can assist their clients with:

Having retirement accounts at the maximum contribution level.

• A loophole in the Roth IRA rules allows for a backdoor Roth IRA.
• Taking advantage of tax losses.
• Having a health savings account contributes to health.
• Saving in a 529 plan.
• Charitable donation plans.
• Investing in municipal bonds is a great idea.
• Investing in qualified opportunity zones is a smart idea.

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Maximizing retirement accounts

The first strategy advisors can help their clients implement is finding places to invest pre-tax. In 2022, the 401(k) contribution limit is $20,500, with an additional $6,500 catch-up contribution for people age 50 and above, for a total of $27,000. It is very common for high-net-worth individuals to be self-employed. In this situation, they may also make employer contributions and benefit from the 401(k)’s maximum contribution of $61,000 plus the $6,500 catch-up contribution, for a total of $67,500.

A backdoor Roth IRA allows you to

While some high-net-worth individuals are also high earners, they may contribute to a Roth IRA beyond the income limits. For the year 2022, single individuals with incomes between $129,000 and $144,000, and married couples filing jointly with incomes between $204,000 and $214,000 may phase out of the Roth IRA contribution limits. If the client is above the income phase-out threshold, he or she may contribute to a nondeductible traditional IRA and then convert the money to a Roth IRA.

The IRS has a pro-rata rule that determines how much of the converted money to a Roth IRA will be taxed. If a client does not have any traditional IRA assets at the end of the year, they may still make a Roth IRA contribution.

The phase-out range for contributing to a Roth IRA is $129,000 to $144,000 for single individuals and $204,000 to $214,000 for married couples filing jointly for the year 2022. The phase-out range for income is $129,000 to $144,000 for single individuals and $204,000 to $214,000 for married couples filing jointly for the year 2022.

If the client exceeds the phase-out range for income, a nondeductible traditional IRA may be made and then converted to a Roth IRA. When converting to a Roth IRA, the IRS has a pro-rata rule that determines what percentage of the money converted will be taxable based on the IRA balance at the end of the year. However, if the client does not have an IRA at the end of the year, they can make a Roth IRA contribution.

Tax Loss Harvesting

Tax loss harvesting is a popular year-end planning strategy, and it’s particularly important for those in higher tax brackets. By selling assets that have lost money in order to offset capital gains in other assets, tax loss harvesting provides clients with an excellent chance to rebalance their portfolios while lowering their overall tax liability.

Tax loss harvesting is a common year-end planning strategy, and it’s especially important for those in higher tax brackets. As the name suggests, it involves selling assets that have lost money in order to offset capital gains in other assets. A rebalanced portfolio in conjunction with a lower overall tax liability provides an excellent opportunity to rebalance a client’s portfolio.

Contribute to an HSA

Individuals can contribute up to $3,650 to an HSA in 2022 if their health insurance plan has a high deductible. If you want to contribute to an HSA in addition to maxing out your 401(k), you can contribute up to $7,300. In addition to the catch-up contribution, individuals can contribute an additional $1,000 for those over 55 years old. Even if the client does not need the money in the present year, it can be invested in a pretax account and used in future years.

Withdrawals from HSA accounts are taxable, with one exception: they are tax-free if used to pay for qualified medical expenses. There is a 20% penalty in addition to regular tax charges if withdrawals are made for any other purpose than qualified medical expenses before age 65. After age 65, clients can withdraw without the 20% penalty, but they will pay regular tax rates if they are not used to pay for qualified medical costs.

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