Increasing your wealth is much more than simply accumulating assets or giving your money to a financial advisor and having them put it into the stock market. Many folks have a financial planner they sit down with once or twice a year, but they neglect to make tax-saving strategies a part of their plan. What they don’t think about is the big picture and how tax-savings strategies can have a much larger impact on one’s wealth than what “average rate of return” has. 

Taxes represent one of the largest, if not the largest drain on a family’s financial assets, so managing them is important. It does not do much good to accumulate a bunch of assets if the government is going to take them. 

Lack of tax planning can cost you hundreds of thousands of dollars over your lifetime. This will have a compounding effect on every dollar that is taxed. Think about this; If you pay $25,000 a year in taxes on the money you make, and you pay that for 30 years, that is $750,000 you pay in taxes. What if we could cut that in half? That is another $375,000 you have made by doing almost nothing and you have not put a single penny at risk. 

 What if you invested that money? How much money does $375,000 make you over your lifetime? How many more vacations could you take with your family? Would you have less debt? Would your retirement look better? Where else can you make that kind of money by doing nothing? 

What about taxes in retirement? In today’s tax environment, it is reasonable to estimate we will pay approximately 25% of the balance of our retirement fund in taxes. We are taught to put money in certain financial vehicles that have a “tax-deferred advantage”. 

This is perceived as a tax-savings strategy, but in reality, it is simply kicking the can down the road and forcing you to pay taxes on a potentially larger bucket of money at what will most likely be, a higher tax bracket. Contrary to the popular myth, most people are not in a lower tax bracket in retirement.  

With the correct tax strategies, we can cut your lifetime tax liabilities in half and create a stream of tax-free cash flow. We are not referring to a Roth. 

tax planning is to ensure tax efficiency and reduce your tax liability

What Is Tax Planning?

Tax planning is the analysis of a financial situation or financial plan from a tax perspective.  The purpose of tax planning is to ensure tax efficiency and reduce your tax liability.  

 Some CPAs only look at your current year and can help you reduce your taxes for the current year. Reducing taxes in the current year is important, but a balanced, long term view is also important. It doesn’t do any good to save a few dollars today on taxes just to pay a much larger bill in the future.  

Tax planning covers several considerations. A few considerations include timing of income, size, and timing of purchases, and planning for other expenditures. The selection of investments and types of retirement plans are also taken into consideration.  

But my Financial Advisor helps me with my taxes

Often, people will say their financial advisor helps with their tax planning. While most financial planners are familiar with taxes and may even know how certain investments are taxed, their expertise is not in taxes, or how various transactions affect your bottom line. They are simply two different skill sets with different knowledge. 

If your financial advisor happens to be a CPA or an Enrolled agent, I still suggest a team effort. Tax laws can be overly complex, and they frequently change. There are simply not enough hours in the day for a professional to keep up with the constant changes in the market, the economy, and the tax law AND maintain good service. 

We can’t control the tax law or the stock market, but we can control and adapt our strategies. By adapting our strategies we can create a better life for ourselves and our family. 

Some Basic Tax Planning Opportunities

By reviewing your portfolios, we can assess taxes, fees, and returns. Oftentimes we can save you fees and taxes and increase your total rate of return.  

  • Tax brackets should also be considered when deciding whether to place certain investments in an IRA or a taxable investment account.
  • Taxable income – Clients with taxable income under certain thresholds do not pay taxes on realized capital gains.  A surprising number of investors are missing out on tax-free rebalancing opportunities. 
  • Loss carryforwards – Some clients have accumulated losses that are available to offset future gains.  Your advisor is missing potential trade opportunities if they are unaware of this information. An investor may be able to take advantage of these losses in an IRA, but cannot take advantage of these in 401K 
  • Controlling taxable income can reduce taxes on Social Security benefits, reduce premiums on Medicare Part B, allow IRA contributions to be deductible, or make Roth IRA contributions an option.
  • Taxable gains in some areas can be offset by selling assets with losses (“loss harvesting”).  On the flip side, “gain harvesting” might make sense in some cases.
  • Charitable giving opportunities can be maximized by gifting appreciated assets, using “double-up” strategies incorporating Donor Advised Funds, or taking advantage of Qualified Charitable Distribution opportunities.
  • Roth conversions can allow a client to take advantage of an unusually low tax bracket.

Reclassify How Your Income is Taxed 

Oftentimes, when people invest in retirement plans, we generate cash flows without much thought.  utilizing deposits, interest, dividends, and withdrawals, the tax costs can be minimized and net returns enhanced.

We can also reduce taxes by strategically withdrawing from accounts in a particular order.  The default for many is to first withdraw from taxable accounts, then deferred, then Roth IRAs. This usually lowers taxes today but these savings are often lost via higher taxes in the future, making other methods preferable.

Phantom gains are a situation where an investor owes capital gains taxes even though their overall portfolio declined in value. Phantom Income refers to income recognized by the IRS, but not actually received by the investor. This most often comes from the mutual funds inside your retirement account. 

Many times we can increase your rate of return and reduce your taxable income while increasing liquidity and reducing your market risk. We do this simply using tax strategies and cash flow strategies   by shift money 

Constant changing of tax laws. Your financial professional doesn’t have the time to keep up with these laws and to know it will affect you in your individual situation. Keeping up with tax law changes is a full-time job in itself. 

We can control and adapt our strategies. We cannot control the stock market.

Increasing your wealth is much more than simply accumulating assets or giving your money to a financial advisor and having them put it into the stock market. Proper tax management has a much larger impact on one’s wealth than an average rate of return on investments does.

Investment advisors and tax planners have two extremely different skillsets and should always work as a team on your family’s financial plan. But Attorneys, Life Insurance experts, and succession planners also need to be brought into the conversation. 

 One of the most important pieces of your financial plan is having a plan that incorporates taxes while making financial decisions throughout the year.  

The reason for this is simple: almost every financial decision has an impact on your taxes. If this impact isn’t taken into consideration while making financial decisions throughout the year, you could be paying more taxes than you otherwise would. It’s important that tax planning is not seen as separate from financial planning. Instead, tax planning should be done as you make financial decisions and incorporated into your overall plan. 

Few financial planners are proficient in taxes, and few tax professionals are proficient in investments or financial planning. They are simply two different skill sets with different knowledge. 

I don’t suggest using a tax advisor as a financial advisor, nor do I suggest using a financial advisor as a tax advisor. Rather, I suggest choosing someone both sets of skills, or, make sure your tax advisor and financial planner work on your plan together. 

Typically, a tax professional will look at what’s best for you in a particular tax year, while a financial planner looks at creating a long term financial plan, but which may have devising tax implications

By employing effective tax planning strategies, you can have more money available to save and invest or more money to spend. … Keep in mind that tax laws are often complex and frequently change. 

Through effective tax planning, all elements of the financial plan fall in place in the most efficient manner.