With tax season underway, the latest Consumer Sentiment Tracker report from Lincoln Financial Group has reaffirmed the need for greater financial literacy when it comes to understanding how tax efficiency can impact your wallet. Only a meager 2% of Americans were able to accurately identify solutions with tax advantages, yet one-third prioritized investments that would help them lessen their overall taxes. This highlights an overall lack of awareness about just how beneficial knowledge in this area can be, as investing and managing assets with tax efficiency in mind can reap great personal benefits. Ultimately, any effort spent enriching yourself with sound and informed investment strategies could prove to be invaluable.
“Lincoln’s research shows consumers are under-educated about tax strategy and tax-efficient investments, revealing a disconnect between aspirations and actions,” said David Berkowitz, president of Lincoln Financial Network – the wealth management arm of Lincoln Financial Group that provides advice and guidance through its extensive network of independent financial professionals. “There is a real opportunity for our industry to help simplify these products and solutions so that Americans can feel more confident making the right financial decisions for themselves and their loved ones.”
5 Tax-Efficient Strategies to Consider as Part of a Holistic Financial Plan
Lincoln Financial Group has put together a list of five tax-efficient strategies that can be considered as part of a holistic financial plan. Let’s take a look!
1. Contribute to a workplace retirement account. Contributing to a workplace retirement account is a great way to save for the future and take advantage of tax benefits. Pretax contributions to your retirement plan reduce your taxable income, allowing you to save more of your hard-earned money today. Additionally, by using pretax contributions, the amount going into your account will be larger than what was taken out of your paycheck. The earlier you start contributing to a retirement savings plan, the more interest you’ll earn over time, and the better prepared you’ll be for a comfortable retirement in the future.
2. Explore the value of lifetime income. Having reliable and guaranteed income in retirement is very important, yet not everyone has sizable savings to last for the rest of their life. This is where a lifetime annuity can be a great supplement that provides monthly pre-retirees with what has become known as “paycheck security”. An annuity can play an important part in any retirement plan since you don’t need to worry about market volatility or having to choose which investments to make – instead, you know each month that you will have a set amount of money coming in. It can be especially beneficial if you have other income, such as Social Security benefits or pension plans, since an annuity could help buffer any gaps that might otherwise appear.
3. Prepare for unexpected long-term care costs. With people living longer and more active lives, there is an increasing likelihood of long-term care becoming necessary. If you are unprepared for the associated costs, this can have a significant financial impact on your family and future plans. As such, while no one likes to think about needing it, having a plan in place ahead of time is essential. A great way to make sure you’re covered is by researching long-term care insurance policies or looking into rider options that are available on some life insurance policies. Talking to your financial professional can help provide invaluable guidance on which option is right for you and your future security.
4. Diversify a portfolio with life insurance. Life insurance offers an additional tool for investors to diversify their portfolios. Unlike other assets, whole life insurance policies have cash value available from policy loans or withdrawals which can provide clients with easy access to funds in times of need or for major events such as college tuition or retirement expenses. This feature allows policyholders to keep the death benefit protection and supplement their existing investments for additional wealth accumulation potential. By including life insurance policies in a portfolio, investors are able to increase the diversity of their financial instruments and reduce risk while gaining access to more financial advantages.
5. Work with a financial professional. With taxes taking a greater share of many people’s earnings now than in the past, it is no wonder that Lincoln’s study showed nearly half of adults to be more concerned about taxes than before. However, only 1 in 5 Americans reported feeling very confident in making financial decisions to minimize their exposure to those taxes. When making these challenging decisions, finding a financial professional you can trust can help alleviate some of the anxiety and stress that come with it. Professional support can provide guidance on how you should manage your money so that you are able to reach your financial goals while potentially minimizing the amount of taxes charged. Working with a financial professional could be a great investment for your future.
These are just a few strategies to consider as you look at your holistic financial picture this tax season (or any time of year). “Ongoing challenges like market volatility, inflation and changing tax laws have the potential to hit us all hard in the wallet,” said Berkowitz. “That’s why tax-efficient investing is an especially important aspect of financial planning that can help you build wealth and achieve your financial goals.”
It’s important to understand how detailed and intricate saving money on taxes can be. There are plenty of strategies that need to be taken into account in order to make sure you are saving enough money when it comes time to pay the IRS. From contributing to a retirement plan, exploring lifetime income, preparing for long-term care costs, diversifying a portfolio with life insurance, and consulting a financial professional–these strategies can help people who want an edge on their taxes. Now that you know what these strategies are and are better equipped with the knowledge of how to navigate them, don’t forget about them!
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This article is intended for informational, entertainment or educational purposes only and should not be construed as advice, guidance or counsel. It is provided without warranty of any kind.