Please enable JavaScript to view the comments powered by Disqus.

SMART INSIGHTS FROM PROFESSIONAL ADVISERS

Are your savings just going to taxes?

Don’t give away more than you have to. Put tax-efficient investing strategies to work.

iStockphoto

There’s a quote from an old Morgan Stanley ad that gets passed around a lot at tax time: “You must pay taxes, but there’s no law that says you gotta leave a tip.”

SEE ALSO: State-by-State Guide to Taxes on Retirees

Savers, especially, should pay heed to this advice.

Taxes already take a chunk of your earnings — the more you make, the more you pay (in most cases). But that burden can be even heavier for those who save and invest.

For example, if you have investments such as mutual funds that aren’t in an IRA/Roth IRA and are generating annual income, that money, in most situations, is 100% taxable. If you didn’t know that, and were surprised when a 1099-DIV showed up in the mail, you may have some re-evaluating to do.

How much of a difference can a tax-efficient portfolio make?

Advertisement

Let’s say there’s a 20-year-old with $100 received from a mutual fund dividend, and he pays 30% (25% federal and 5% state) in taxes. He’s left with just $70.

Next, let’s look at his twin brother’s account. He has assets in the same amount, but it’s been structured in a way so that 50% isn’t taxable. He’s paying $15 in taxes — 30% of $50 — and ends up keeping $85 instead of $70.

For a younger person, that tax savings is important because of the compounding interest; if you’re keeping more, you’re likely investing more, and you’re probably earning more.

Even if these brothers got the exact same rate of return on the exact same dollar amount, the one with the tax-efficient portfolio is going to likely end up with more money in retirement.

Advertisement

Now, let’s go bigger — and older.

Recently, we had a woman come in with a $1.5 million portfolio — all stocks, bonds and mutual funds, no municipal bonds or any tax-advantaged vehicles. All of the money was non-qualified (or non-retirement), and therefore all of the income being created was taxable. Her adviser told her that when she reaches retirement, her portfolio will provide $40,000 in income each year.

But that isn’t a complete picture. I ran the numbers and showed her: With that $40,000 in income, and paying 30% in taxes ($12,000), she’ll really be living on only $28,000.

If she had a 50% tax-efficient portfolio, she’d keep $34,000 instead of that $28,000. Which one would you rather be living on?

Advertisement

Unfortunately, this seems to be the message a majority of the population doesn’t hear. Instead, much of their focus goes to rate of return or that big number at the bottom of those quarterly statements.

But even if the rate of return on your mutual fund is 7% or more, you’re not getting all of that. That’s not the net. And if that big dollar amount is bumping you into a higher tax bracket, you’re not keeping as much as you could.

In the end, it isn’t about how much you make, it’s about how much you keep.

Your financial adviser can help you find tax-wise ways to help shield your assets and still use income-producing assets such as municipal bonds, interval funds, alternative investments, IRAs, real estate and other strategies. Get an analysis of your portfolio to help ensure the money you’ve put away to build a better future doesn’t end up costing you at tax time.

Advertisement

See Also: How Dividend-Paying Stocks Can Energize Your Portfolio

Kim Franke-Folstad contributed to this article.

The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult with your tax and/or legal adviser for such guidance.

Megan Clark is executive vice president at Clark & Associates Inc. Financial Solutions and is an Investment Adviser Representative and Insurance Professional. As a financial adviser, she is passionate about helping families create a holistic financial plan, and she often holds "For Women By Women" informational seminars to reach out and help assist women in pursuing their goals. Clark is a graduate of the University of Virginia.

Securities offered through Kalos Capital, Inc. and Investment Advisory Services offered through Kalos Management, Inc., both at 11525 Park Woods Circle, Alpharetta, Georgia 30005, 678-356-1100. Clark and Associates, Inc. is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.

Comments are suppressed in compliance with industry guidelines. Click here to learn more and read more articles from the author.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.