542 | Mastering Tax Strategies: How to Optimize Your Path to Financial Independence

ChooseFI

In this episode of ChooseFI, hosts Brad and Sean Mulaney dive deep into tax strategies crucial for financial independence, focusing on tax basketing, asset location, and effective use of retirement accounts. The conversation includes recent changes regarding 529 plans funding Roth IRAs and reassurances for those starting their financial journey at any age.

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Fidelity's 529 Withdrawal Guide

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Schwab Guide on How to Sell Specific Lots

Note from Sean Sean also wanted to clarify that in order to qualify to use the IRS Joint Life and Last Survivor Expectancy table to compute required minimum distributions for the older spouse, the older spouse must be more than 10 years older than the younger spouse and the younger spouse must be the 100 percent primary beneficiary.

Key Topics Discussed:

• Question from Jay regarding tax strategies 00:00:53

  • Exploration of tax drag vs. tax strategies for high savings rates

• Discussion on Tax Basketing 00:01:38

  • Explanation of asset location and tax implications for early retirees

• Query about 529 Plans and Roth IRA Conversions 00:10:59

  • Recent changes in Secure Act 2.0 regarding 529 accounts

• Advice for Starting Financial Independence at Age 35 00:17:42

  • Encouragement that it’s never too late to start financial independence

• Explaining Capital Gains and Taxation 00:25:23

  • Understanding tax on gains from asset sales and strategies for minimizing it

• Options for Late Savers 00:30:27

  • Discussion on optimal retirement account strategies at different life stages

• Final Thoughts and Resources 00:51:12

  • Recap and resources for listeners to further explore these topics

Actionable Takeaways:

• Consider tax basketing to optimize your investment strategy in retirement accounts. 00:10:04
• Explore Roth conversions annually to potentially minimize RMDs and tax burdens. 00:36:46
• Start your financial independence journey today, regardless of your current age or financial situation. 00:22:10

Key Quotes:

• "Tax drag isn’t really much of a thing at all." 00:03:07
• "It literally takes $0 to start." 00:18:22
• "This is an opportunity, not a problem." 00:10:04
• "You do not need a backdoor Roth IRA." 00:24:11
• "It’s never too late to start on the path to FI." 00:22:41

Timestamps:

• 00:00:53 Tax Strategies
• 00:01:38 Tax Basketing Discussion
• 00:10:59 Roth IRA from 529 Plans
• 00:17:42 Starting at Age 35
• 00:25:23 Capital Gains Taxation
• 00:30:27 Strategies for Late Savers
• 00:51:12 Final Thoughts

Discussion Questions:

• How can tax basketing improve your investment strategy? 00:10:01
• What steps can you take to maximize the benefits of a backdoor Roth IRA? 00:24:11
• What financial actions can individuals take today to start their path to financial independence? 00:22:10

FAQs:

• What is tax basketing?

  • Tax basketing refers to the strategic allocation of various asset types (Roth, traditional, taxable) to minimize tax liabilities. 00:10:01

• How does the Secure Act 2.0 affect 529 plans?

  • The Secure Act 2.0 allows for up to $35,000 from 529 plans to be transferred to a beneficiary's Roth IRA. 00:11:21

• Is it too late to start financial independence at age 35?

  • Absolutely not; starting at 35 can still lead to successful financial independence with the right strategies. 00:22:10