Are Your Savings Just Going to Taxes?
Don't give away more than you have to. Put tax-efficient investing strategies to work.
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.”
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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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?
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.
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?
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.
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.
Examples are for illustrative purposes only and may not be indicative of your situation. Your results will vary.
Securities offered only by duly registered individuals through Madison Avenue Securities, LLC (MAS), Member FINRA & SIPC. Advisory services offered only by duly registered individuals through Brighter Financial Capital Management, LLC, a SEC Investment Advisor. Insurance products and services are offered through Clark & Associates, Inc. Financial Solutions, an affiliated company. Brighter Financial Capital Management, LLC and MAS are separate entities, independently owned.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Related Content
-
Timeless Trips for Solo TravelersHow to find a getaway that suits your style.
-
A Top Vanguard ETF Pick Outperforms on International StrengthA weakening dollar and lower interest rates lifted international stocks, which was good news for one of our favorite exchange-traded funds.
-
Is There Such a Thing As a Safe Stock? 17 Safe-Enough IdeasNo stock is completely safe, but we can make educated guesses about which ones are likely to provide smooth sailing.
-
Missed Your RMD? 4 Ways to Avoid Doing That Again (and Skip the IRS Penalties), From a Financial PlannerIf you miss your RMDs, you could face a hefty fine. Here are four ways to stay on top of your payments — and on the right side of the IRS.
-
What Really Happens in the First 30 Days After Someone Dies (and Where Families Get Stuck)The administrative requirements following a death move quickly. This is how to ensure your loved ones won't be plunged into chaos during a time of distress.
-
AI-Powered Investing in 2026: How Algorithms Will Shape Your PortfolioAI is becoming a standard investing tool, as it helps cut through the noise, personalize portfolios and manage risk. That said, human oversight remains essential. Here's how it all works.
-
A Newly Retired Couple With a Portfolio Full of Winners Faced a $50,000 Tax Bill: This Is the Strategy That Helped Save ThemLarge unrealized capital gains can create a serious tax headache for retirees with a successful portfolio. A tax-aware long-short strategy can help.
-
5 Retirement Myths to Leave Behind (and How to Start Planning for the Reality)Separating facts from fiction is an important first step toward building a retirement plan that's grounded in reality and not based on incorrect assumptions.
-
I'm a Financial Adviser: Silence Is Golden, But It Hurts Your Heirs More Than You ThinkTalking to heirs about transferring wealth can be overwhelming, but avoiding it now can lead to conflict later. Here's how to start sharing your plans.
-
Will Your Children's Inheritance Set Them Free or Tie Them Up?An inheritance can mean extraordinary freedom for your loved ones, but could also cause more harm than good. How can you ensure your family gets it right?
-
I'm a Financial Adviser: This Is the Real Key to Enjoying Retirement With ConfidenceA resilient retirement plan is a flexible framework that addresses income, health care, taxes and investments. And that means you should review it regularly.
