Here’s how I tackle tax planning as a certified financial planner

Roughly 10 years ago, I began shifting careers from concert promoter to personal finance journalist. Back then, I thought about taxes exactly once per year — when it was time to file my annual return.

Now, as a tax reporter for CNBC, I focus on tax strategy all year, including how retirement contribution decisions may affect long-term plans. It helps that I am one of a handful of working journalists to have earned the certified financial planner designation.

Over the years, I’ve learned tax planning can’t happen in a silo because today’s decisions often have future consequences.

Certain tax moves are “like a balloon,” Ashton Lawrence, CFP and director at Mariner Wealth Advisors in Greenville, South Carolina, once told me. “If you squeeze it at one end, you’re going to inflate it somewhere else.”

Here’s how I’ve tackled tax planning in my portfolio, and how my strategy has changed over the past decade.

One of the biggest questions from investors is whether to save money into a pretax or after-tax Roth account.

While pretax contributions can reduce adjusted gross income, you’ll owe regular taxes on withdrawals in retirement. By contrast, there’s no upfront tax break for Roth contributions, but the money grows tax-free. 

Generally, pretax contributions benefit higher earners, while after-tax savings make sense in a lower bracket, experts say. Of course, factors such as matching contributions, each plan’s investment options and fees, along with legacy goals, can affect the decision.

Early in my career, I focused on Roth savings, which made sense with lower income and decades until retirement. But it’s tough to predict future brackets, so I’ve shifted to tax diversification across investing accounts.

I’ve prioritized my employer match with pretax and Roth 401(k) deferrals, while also making Roth individual retirement account contributions. I’ve also funneled extra money into my taxable brokerage account, which incurs capital gains taxes on earnings yearly, but can be tapped before retirement.

There’s also a small nest egg in my health savings account, which I added to during my years of self-employment. I’ve invested the balance and hope to make tax-free withdrawals for medical expenses in retirement.

The goal is flexibility. With a mix of tax-deferred, tax-free and taxable savings, I’ll have different accounts to pull from, depending on my yearly tax situation.

JoAnn May, a CFP and certified public accountant at Forest Asset Management in Berwyn, Illinois, told me, “ideally, it’s nice to have clients with all types of accounts” for different types of assets.

Indeed, your asset location can trigger a surprise tax bill, as I learned from capital gains in a brokerage account early on. Generally, income-producing investments, such as bonds or real estate investment trusts, are better suited for tax-deferred or tax-free accounts.

However, experts are quick to warn you shouldn’t “let the tax tail wag the investing dog.” Your portfolio should be a mix of investments based on your goals, risk tolerance and timeline — not solely based on tax savings.

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