hero help clients make plans to lower their next tax bill

How to help clients create a tax strategy

Being proactive can help address tax increases down the road.

Even though it’s common for clients to wait until April before trying to reduce their income taxes, being proactive earlier is often better. Thinking through the available options while the year is young not only gives more time to implement choices, it can also provide more opportunities.

A tax-efficient strategy is of particular importance when creating a financial plan for retirement – and it's a big concern for many. The majority of Americans (70%) said they are concerned about taxes on their income in retirement, according to the 2024 1Q Quarterly Market Perceptions Study* from Allianz Life.

What makes a strategy tax-efficient can change as new legislation is introduced. Recent tax law changes contained tax repeals, extenders, and retirement plan modifications that may affect financial strategy. Some new legislation includes the SECURE Act of 2019, CARES Act of 2020, the Consolidated Appropriations Act of 2021, and the Infrastructure Investment and Jobs Act, signed late in 2021.

One of the first steps a client can take to reduce their tax risk is to review their latest income tax return. This review can help identify options for financial strategies to improve their long-term income tax outcome.

A financial professional, along with the client’s tax advisor, can help the client identify what strategies might be appropriate for their financial situation.

Here are a few strategies the client’s financial team could suggest to lower the tax burden and help with retirement savings.

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Deferring taxes on retirement savings

Clients can defer income taxes on the growth of retirement money by using a nonqualified annuity. And typically, there are no required minimum distributions. These annuities offer the ability to earn interest without paying taxes on the earnings until money is withdrawn. Then, when funds are withdrawn, the money is taxed like ordinary income on any gains. Just be aware – withdrawals made from annuities prior to age 59½ may be subject to a 10% federal additional tax, and the annuity company may impose withdrawal or surrender charges within the withdrawal or surrender charge period.

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Pre-tax retirement plans

One way to reduce the current overall tax bill is by maximizing pre-tax contributions to retirement plans such as a 401(k), 403(b), Individual Retirement Account or Individual Retirement Annuity.1 This can help clients reduce their tax burden in the short term and provide more time for retirement savings to grow in the long term. While there are limits to the amount that can be contributed, these plan are often the first stop in tax-advantaged choices.

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Donor Advised Fund

A Donor Advised Fund allows clients to put money in a “giving fund” today while sending it to qualified charities at some point in the future. So, for clients in relatively high tax brackets (often clients in their 50s and 60s), they can make the gift and receive a deduction (if they qualify to itemize deductions) while making the actual disbursement decision later.

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Roth IRA conversion

While a Roth IRA conversion does create ordinary income in the year of conversion, as long as the distributions from the Roth IRA are qualified, all growth after that is income-tax-free. Generally, if the taxpayer anticipates being subject to higher tax rates in the future than the taxpayer is subject to today, Roth IRA conversions might help the client ultimately have a source of income that is free from income taxes in retirement.2

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Health Savings Accounts

A Health Savings Account (HSA) can help pay qualifying medical expenses with pre-tax dollars. But, if the situation is right, it can also be used to build a tax-advantaged retirement savings account. While using an HSA as a retirement plan isn’t for everyone, the contributions are pre-tax and the investment returns can be withdrawn without penalty when done according to the guidelines, so it will act like an additional IRA. And distributions won’t be taxed if used to pay for qualifying medical expenses. For many who are maximizing their pre-tax retirement plans and are now looking for other ways to save, an HSA might fit the bill.

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We have created materials that you can use with your clients

There are valuable resources for you – including a tax review kit, a year-end tax checklist, and other supporting materials.

* Allianz Life conducted an online survey, the 2024 1Q Quarterly Market Perceptions Study, in February 2024 with a nationally representative sample of 1,005 respondents age 18+.

1 Purchasing an annuity within a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to purchasing an annuity within a tax-qualified retirement plan.

2 Converting a qualified plan or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits. It is generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA. If you elect to take a distribution from your IRA to pay the conversion taxes, please keep in mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions.

This content is for general educational purposes only. It is not intended to provide fiduciary, tax, or legal advice and cannot be used to avoid tax penalties; nor is it intended to market, promote, or recommend any tax plan or arrangement. Allianz Life Insurance Company of North America, its affiliates, and their employees and representatives do not give legal or tax advice. Customers are encouraged to consult with their own legal, tax, and financial professionals for specific advice or product recommendations.