Do You Have a Tax Plan?


Why Should I Care?

When I work with clients on setting up their retirement plans, one of the areas that we must focus on for a financially secure future is taxes. After all, nobody can tell you for sure what taxes will be like in 10 or 20 years. We can make educated guesses, but the only thing we know for sure is that they are likely to go up over time.

Most folks look to diversify their investments to achieve growth and capital preservation. You should also consider how important tax diversification is to have long-term financial security.

How much of a difference? Well consider the following offer: would you rather have $100,000 or $1 doubled 20 times? The correct answer is: it depends. See, $1 doubled 20 times comes out to $1,048,576! However, if we apply a 25% tax to each doubling, the answer is just over $75,000! I would say this is a huge difference. So growing money in a tax-free environment is very important.

What is the point?

While growing assets in a tax-free environment is important, it isn’t possible for most of us to have all of our assets growing tax free. Because of that, being strategic when it comes to spending becomes very important. After all, taxes are a fact of life, but I don’t believe in overpaying.

Let me share a few examples:


Retired and Low Income

Some years ago, a client was referred to me. They were already retired, but their income was too low to meet their expenses. The cash cushion they were using to fill in their shortfall was going to be exhausted in a few months. They were getting most of their income, besides Social Security, from a rental property they owned.

The rental income had not gone up as much as the value of the property, but they didn’t want to push big rent increases on their long-term tenants. They had owned the property for about 4 decades and it had appreciated over 1200%! So they told me they were tired of being a landlord, and their plan was to sell the property, pay the tax and have me invest the balance after taxes, fees, transaction costs and paying off the mortgage. We figured out that we would only be able to generate about the same income as before, if they wanted a steady, consistent revenue stream.

After looking over their entire situation, we were able to show how a tax deferred 1031 exchange would allow them to defer payment of tax on their gain and increase their income by 100%! So, looking at the impact of taxes on their investment options made all the difference.


A Dream Bucket List Vacation

About 10 years ago, another client called me excitedly to tell me they had just paid for their dream, bucket list vacation. The cost was about $20,000 and they were worried that it would sell out, so they drew the money from an IRA without consulting me first.

That withdrawal increased their taxable income and generated a tax bill of almost $5,000, suddenly the trip wasn’t such a bargain. If they’d asked me before withdrawing from the IRA, I would have reminded them of the tax-free resource that they could have taken the funds from. If they’d drawn the money from there instead, the cost would have been reduced by 20%.


Lots of Money in IRAs

Another time, we were doing an annual review with a client who had a lot of money in IRAs. As we reviewed how well the investments were doing in the accounts, the conversation came around to the fact that they wanted that money to go to their kids and grandkids. They would not take any money out if it wasn’t for their required minimum distributions (RMDs). I showed them how their beneficiaries would only get around $350,000 of the $500,000 current balance due to taxes (and the rules are more punitive today than they were back then).

I showed them how we could reposition the $500,000 over time and then leverage that money to guarantee the heirs would receive at least $1,000,000, net after tax, while having greater access to their money if they needed it for emergencies or opportunities while they were alive.


Looking at the Big Picture

As you can see from these examples, looking at the big picture can help make more efficient decisions. Knowing what you are trying to accomplish and then using the strategies that will get you there most efficiently can make all the difference in the world.

Given the current backdrop and the strong likelihood taxes will be increasing in the future having a big picture tax plan is more important than ever. Take advantage of our current historically low tax rates while you can to plan for a more secure future.

Free Report: The 6 ‘Hidden’ Tax Saving Opportunities Opened Up by New Tax Rules

We know that there have been a number of tax changes that have occurred over the past few years. With that in mind, I have a report called “The 6 ‘Hidden’ Tax Saving Opportunities Opened up by New Tax Rules”. This report offers some good suggestions on both traps to avoid and opportunities to take advantage of. If you would like a copy, please call the office at 415-331-9030, or contact us through the website and request a copy. We will be happy to send it to you.