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
Be a smarter, better informed investor.
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
-
Holidays Are a Rich Time to Talk Money With Young Adults: A Financial Adviser's Guide for ParentsThe most productive family financial conversations start with open-ended questions and a lot of listening. Don't let this opportunity pass you by.
-
How Women of Wealth Are Creating a New Model of Giving Through Family OfficesWomen who are inheriting wealth today are shifting from traditional philanthropy to creating sustainable systems to fund philanthropic gifts into perpetuity.
-
I'm a Financial Planner: This Retirement GPS Helps With Navigating Your Drawdown PhaseReady to retire? Here's how to swap your 'peak earnings' mindset for a 'preserve-plus-grow' approach instead of relying on the old, risky 4% rule.
-
Donating Stock Instead of Cash Is the 2-for-1 Deal You'll Love at Tax TimeGiving appreciated stock or using a donor-advised fund (DAF) this year would be smarter than writing a check to support your favorite causes. Here's why.
-
Traveling With Purpose: What Zambia and Zimbabwe Taught Us About Slowing DownDon't treat retirement trips like they're an exercise in ticking off boxes. Slowing down and letting adventure unfold can create more meaningful memories.
-
Investment Expert: Is Your Retirement Portfolio Too Late to the Profit Party?If you're following the usual retirement investment model, you could be missing out on a potential profit period that companies see in the run-up to their IPOs.
-
Losing Your Job? A Financial Planner's 6 Steps to Survive and ThriveWhether pink slips are just rumors at your company or layoffs have already landed, there are things you can do today to make the best of a tough situation.
-
Oil Prices vs Investor Returns: It's What's Beneath the Surface That CountsEngineering, geology and operating discipline can determine the success of oil and gas projects as much as the cost per barrel.
