TaxesLife, Liberty, and Tax-Advantaged Opportunities

Americans are passionate about taxes.

 

We have reason to be. In recent years, Americans have spent more on taxes than on food, clothing, and housing combined.1 The Tax Foundation estimates Americans will pay $3.4 trillion to the federal government and $1.8 trillion to state and local governments in 2019.2

If you believe you’re paying too much tax, selecting investment vehicles that emphasize tax-advantaged opportunities could help reduce the amount of taxes you owe. There are tax-free and tax-advantaged options available. Here are a few to consider:

  • Municipal bonds, also known as munis, help provide funding for schools, hospitals, utilities, and other projects. The interest paid by municipal bonds is free of federal income tax. Some bonds may pay interest that also is exempt from state income tax. Generally, this is true if you reside in the state issuing the bond.3

At first glance, munis may seem less attractive than corporate bonds or Treasuries because municipal bonds generally offer lower yields than taxable bonds of similar maturity and quality. For instance, a muni yielding 3.3 percent may not be as enticing as a taxable bond yielding 4.8 percent, until you take taxes into account.4

Imagine: an investor in the 35 percent tax bracket has a choice between investing in a federally tax-free municipal bond yielding 3.3 percent or a taxable bond yielding 4.8 percent. Which will provide more income after taxes?4

In this example, the tax-free bond provides more income. Because the investor is in a higher tax bracket, he is able to benefit from owing no federal taxes on the muni bond. As a result, the lower yielding bond delivers more income to the investor than the taxable bond.5

In this case, the investor would need to find a taxable bond of the same maturity and quality yielding 5.08 percent to earn as much income as a muni bond would deliver.*5

  • Roth Individual Retirement Accounts (IRAs) are tax-advantaged accounts. Owners pay taxes on contributions made to Roth IRAs but the account earnings grow tax-free, and every penny earned can be withdrawn tax-free, as long as certain conditions are met.**6

When investors start saving early, Roth IRAs have the potential to offer substantial tax-free income later in life. If a 27-year-old saved $100 a month until full retirement age (67), and earned 6 percent a year on average, the account would be worth more than $198,000 ($48,000 saved and $150,000 in earnings). All of it could be withdrawn tax-free.6

Another Roth IRA advantage is investors don’t have to take required minimum distributions (RMDs) from a Roth IRA at age 72. As long as an owner has held an account for five or more years, the beneficiary who inherits the Roth can take tax-free distributions, too. (Beneficiaries are subject to RMDs.)6

  • Roth retirement plan contributions are an option in some workplace retirement plans. Talk with your company’s human resources group to find out whether Roth contributions are allowed. Contributions to Roth plan accounts are made with after-tax dollars, but any earnings grow tax-free and distributions are tax-free, just as they are for Roth IRAs. An important difference is RMDs must be taken from Roth plan accounts at age 70½.7
  • Health Savings Accounts, or HSAs, offer Americans a way to save for current and future healthcare expenses in tax-advantaged accounts. You can open an HSA as long as you participate in a high-deductible health plan (HDHP). It’s a choice worth considering because HSAs have a triple tax advantage:8
        • HSA contributions are tax-deductible
        • Any interest and earnings in the account grow tax-free
        • Distributions are tax-free when taken for qualifying medical costs

HSAs are different than Flexible Spending Accounts (FSAs). You own the HSA and, if you don’t spend the money in the account, you keep it until you need it. The account is yours, even when you change employers. Employers own FSAs and unspent funds are often forfeited at year-end.8

Fidelity estimated the average 65-year-old couple, retiring in 2019, would need about $285,000 for medical expenses during retirement, excluding long-term care. The estimate assumes the couple does not have employer-provided retiree healthcare coverage and does qualify for Medicare.9

  • 529 College Savings Plans are a tax-advantage way to save for education. States and educational institutions sponsor 529 plans. Some offer prepaid tuition plans and others offer education savings plans. Contributions are considered to be gifts for tax purposes, so a couple could contribute up to $30,000 for each child each year.10, 11

Anyone can open and contribute to a 529 College Savings Plan, including parents, grandparents, or friends. Contributions are not federally tax deductible, but earnings grow tax-free and withdrawals used to pay qualified school expenses are tax-free.12

Account holders can withdraw up to $10,000 in tuition expenses for private, public, or religious elementary and secondary schools per year, per beneficiary.12

In addition to the options described here, there are many investment strategies and opportunities that deliver tax advantages to investors. If one of your goals is to pay as little as possible in taxes, there are a variety of ways to do it. Give us a call to see how we can help.

* Tax equivalent yields are found by dividing the tax-free yield by 1 minus tax bracket. In this case 3.3 percent / 1-35 percent = 5.08 percent.5

** As long as you have owned the Roth account for five years and you’re age 59½ or older, you can take distributions anytime you want without owing federal taxes.6

Sources:

1 https://www.politifact.com/truth-o-meter/statements/2014/apr/23/tax-foundation/do-americans-pay-more-taxes-food-clothing-and-hous/

2 https://taxfoundation.org/publications/tax-freedom-day/

3 https://www.schwab.com/public/schwab/investing/accounts_products/investment/bonds/individual_bonds/municipal_bonds

4 https://www.aaii.com/journal/article/munis-vs-taxables-how-to-determine-the-taxable-equivalent-yield

5 https://www.investopedia.com/terms/t/taxequivalentyield.asp

6 https://investor.vanguard.com/ira/roth-ira

7 https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts

8 https://money.usnews.com/money/retirement/aging/articles/2018-10-17/6-myths-about-hsas-for-retirement

9 https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/press-release/healthcare-price-check-040219.pdf

10 https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html

11 https://www.savingforcollege.com/article/how-much-can-you-contribute-to-a-529-plan

12 https://www.savingforcollege.com/intro-to-529s/name-the-top-7-benefits-of-529-plans

 

Securities offered through “LPL Financial”, Member FINRA/SIPC.

This material was prepared by Carson Coaching. Carson Coaching is not affiliated with the named broker/dealer or firm.

All examples given are hypothetical and for illustrative purposes only. No example is representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

This is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.

Municipal bonds are federally tax-free but other state and local taxes may apply. Interest income may be subject to the alternative minimum tax.

Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

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Copyright © Bailey Wealth Services 2021

Holly Farrar

Client Services Associate

As director of First Impressions, I strive to make sure our clients have a comfortable and meaningful experience while providing remarkable customer service at the highest standards. I enjoy going to local Everett events and festivities while spending time with friends and family. I love to read, especially dystopian novels.  I am involved in volunteering opportunities within the community including grocery shopping for homebound people, coffee trailer and first responder appreciation.

Education and Biography

Training

Holly Studied Business and Management at Sno-Isle Business and Management & Everett Community College. She has over 20 years of customer service and administrative experience.

Specialisms

Holly’s focus is to create meaningful connections between our clients and our office. She schedules appointments, answers calls, processes transactions, preparing paperwork to maintain accounts as well as opening new accounts, and transfers.

Albert Ballesteros

With over 25 years of customer service working in the Financial Industry and the State of Washington, Albert is a welcome addition to the service team. He helps with opening new accounts and servicing current accounts. You have probably received appointment reminders from him. He also works with the marketing team in planning monthly letters to clients, planning special events and creating the weekly newsletters.
In his spare time, he volunteers at Northshore Christian Church, having completed two mission trips to the Philippines and has a passion for singing. He enjoys playing and watching most sports but is especially an avid fan of the Everett Silvertips.

Education and Biography

TRAINING

Albert attended Honolulu Community College where he obtained his AA in Liberal Arts.

SPECIALISMS

Albert joined Bailey Wealth Services in 2022. His focus is to provide support to both prospective and existing customers with exceptional customer service. He is very personable and brings professionalism to his role.

Wes Burroughs

One of the things I enjoy most about what I do is educating clients on what is available to them as an investor. Our clients know where they’re at financially and where they are going because we make breaking down the complexities of a constantly changing world a top priority. Outside of work, I love spending time with my wife, Blyn, and playing with our daughter, Sophia. I also enjoy running and hosting game night with friends.

Education and Biography

TRAINING
Wes attended Liberty University where he obtained his BA in Philosophy.

SPECIALISMS
Wes joined Bailey Wealth Services in 2021. His focus is helping families maintain and grow the wealth they already have. Wes enjoys working with our valued clients to facilitate financial relationships by providing solutions, solving problems, and helping them manage their financial lives.

A. Sean Bailey, CFP®

My mission is to assist families as they strive to acquire, accumulate and retain wealth in a tax efficient manner so they may live in retirement with confidence and dignity. When I’m not engaged in professional activities, you can find me on a mountain top with my wife, Kim, and our two children, Eleanor and Oscar.

Education and Biography

TRAINING
Sean received his Bachelor’s Degree in Business Administration, Finance Concentration, from the University of Washington.

SPECIALISMS
Sean Bailey has been in the financial services industry for 30 years. He specializes in developing comprehensive financial, estate and retirement planning strategies for clients nearing and in retirement. Sean is a Registered Principal and Investment Advisor with LPL Financial. He is a CERTIFIED FINANCIAL PLANNER™ Practitioner. Sean is also a member of the Financial Planning Association and Ed Slott’s Elite IRA Advisor Group.

Ed Slott’s Elite IRA Advisor Group is not affiliated with Bailey Wealth Services or LPL Financial.

Sonya Jones

I endeavor to provide excellent service to our clients and organizing processes and procedures to ensure our office runs smoothly. When not working, I enjoy spending time with my fiancé, Erik, and our two boys, Lukas and Archer along with our dog Pixie. I love cooking for them and experimenting with different recipes and techniques, including treats for Pixie. Our favorite family activity is taking road trips, especially to California to visit family and friends.

Education and Biography

TRAINING

 

Sonya received her BA in Art at California State University, Chico and has over 25 years of administrative and customer service experience in the financial services and accounting industries.

 

SPECIALISMS

 

Sonya’s focus is to help clients reach their financial goals by assisting them with their various transactions and paperwork to service and maintain their accounts. This includes opening new accounts and initiating transfers from and to financial institutions. Sonya is constantly looking for new ways to improve our processes to ensure we work efficiently and in a manner that creatives positive experiences for our clients.

Sonya Jones

I endeavor to provide excellent service to our clients and organizing processes and procedures to ensure our office runs smoothly. When not working, I enjoy spending time with my fiancé, Erik, and our two boys, Lukas and Archer along with our dog Pixie. I love cooking for them and experimenting with different recipes and techniques, including treats for Pixie. Our favorite family activity is taking road trips, especially to California to visit family and friends.

Education and Biography

TRAINING
Sonya received her BA in Art at California State University, Chico and has over 25 years of administrative and customer service experience in the financial services and accounting industries.

SPECIALISMS
Sonya’s focus is to help clients reach their financial goals by assisting them with their various transactions and paperwork to service and maintain their accounts. This includes opening new accounts and initiating transfers from and to financial institutions. Sonya is constantly looking for new ways to improve our processes to ensure we work efficiently and in a manner that creatives positive experiences for our clients.