The post can be viewed on Investopedia here.

Question Headline:

What are some strategies to minimize the impact of taxes for high earners in a high-tax state?

Question Body:

My wife and I make $900,000 combined. We live in California, and pay a lot of taxes. Most of our income comes from our salaries and bonuses. We’d like to minimize the impact of taxes. What might be some good choices for us to consider? Tax-exempt bonds won’t work, and tax-loss harvest has a marginal impact on our net income. Is real estate investing a good idea? What ideas should we consider?

Answer:

You and your wife pay a lot in taxes because you are high earners. This is a good problem to have, but it doesn’t make the problem any more painful. There are a number of things you should be doing to lessen the burden of taxes while also investing and accumulating wealth.

1. Maxing Out Employer Retirement Plans: If you and your wife have an employer retirement plan such as a 401k through work, you each need to be maxing your contributions out.

2. Maxing out Health Savings Account (HSA)/Flexible Spending Account (FSA)

3. Maxing out Non-deductible IRA contributions, and possible converting into a Roth IRA annually: If you and your wife do not have pre-tax (traditional) IRAs you could each make maximum non-deductible contributions to an IRA and convert the account into a Roth every year. If you do have pre-tax IRAs consider conversations and still open another separate IRA to make non-deductible IRA contribuitons.

You all should certainly be making sizable contributions to a joint brokerage account. This account doesn’t have any tax benefits, but it does combine liquidity with an ability to invest in securities. The management of this account needs to be tax conscious.

If you all have children or are connected to children you would like to help with college then 529 Plan contributions could be another option.

In general I do not recommend permanent life insurance, or life insurance as an investment, but in your scenario buying policies that are tied to a stock market index and maximum funding them over 1-5 years is another option to explore.

A private family foundation and/or a donor advised fund are potentially perfect for you and your wife depending on how much your living costs are.

Lastly, buying real-estate perhaps in a separate LLC which you create could give you a way to accumulate a great deal of wealth in a tax efficient way.

The best advice I can give you is to consult with a combination of your team of experts and review all the options. You team should include a wealth/investment adviser, CPA, and estate planning attorney. If you do not have a team, then you should begin building it right away. You and your wife fall into a category where paying for expertise is a no-brainer. Your wealth is not a DIY project that can be managed on the cheap.

– Wyatt Swartz

– 9/17/2018