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.
Sign up for Kiplinger’s Free E-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
-
Stock Market Today: Have We Seen the Bottom for Stocks?Solid first-quarter earnings suggest fundamentals remain solid, and recent price action is encouraging too.
-
Is the GOP Secretly Planning to Raise Taxes on the Rich?Tax Reform As high-stakes tax reform talks resume on Capitol Hill, questions are swirling about what Republicans and President Trump will do.
-
Social Security Is Taxable, But There Are WorkaroundsIf you're strategic about your retirement account withdrawals, you can potentially minimize the taxes you'll pay on your Social Security benefits.
-
Serious Medical Diagnosis? Four Financial Steps to TakeA serious medical diagnosis calls for updates of your financial, health care and estate plans as well as open conversations with those who'll fulfill your wishes.
-
To Stay on Track for Retirement, Consider Doing ThisWriting down your retirement and income plan in an investment policy statement can help you resist letting a bear market upend your retirement.
-
How to Make Changing Interest Rates Work for Your RetirementHigher (or lower) rates can be painful in some ways and helpful in others. The key is being prepared to take advantage of the situation.
-
Within Five Years of Retirement? Five Things to Do NowIf you're retiring in the next five years, your to-do list should contain some financial planning and, according to current retirees, a few life goals, too.
-
The Home Stretch: Seven Essential Steps for Pre-RetireesThe decade before retirement is the home stretch in the race to quit work — but there are crucial financial decisions to make before you reach the finish line.
-
Three Options for Retirees With Concentrated Stock PositionsIf a significant chunk of your portfolio is tied up in a single stock, you'll need to make sure it won't disrupt your retirement and legacy goals. Here's how.
-
Four Reasons It May Be Time to Shop for New InsuranceYou may be unhappy with your insurance for any number of reasons, so once you've decided to shop, what is appropriate (or inappropriate) timing?
