Years ago, one of my wealthy, good ol’ boy clients taught me his two rules of income tax planning.
Rule 1: Having to pay tax is a good problem to have!
Rule 2: Don’t pay any tax today you don’t have to.
Obviously, most of us would agree the first rule is a good problem to have. If we are paying taxes, then it means we are making money somewhere. This could be through regular income, business proceeds, investments, etc…
The second rule, though, is a bit trickier. While easy to say, it is often much more difficult to implement. And on top of that, what if paying taxes today makes sense?
I know it doesn’t seem like it, but we are currently in a period of historically low income tax rates. If you don’t believe me, Google historical income tax rate charts and you will see what I mean.
If you could pay the tax today, and never have to pay it again in the future, this might be a good idea in light of our nation’s current economics. Not many people would argue against the fact that taxes will most likely be going up in the future.
Many people utilize Roth IRA and Roth 401k accounts to accomplish this purpose by contributing after tax dollars today that will never be taxed again in the future. Sounds great doesn’t it?
But what about people who aren’t eligible to contribute to these programs or have already maxed them out and still want to save for the future in a tax efficient manner?
I think we would all agree that paying taxes on money you are not currently using is frustrating at the least. This is where the argument for tax deferral comes in.
For years, accountants have told us to save money pre-tax because when we take it out in retirement we will be in a lower income tax bracket. I have met with many clients over the years who employed this tax-deferral strategy in their retirement accounts only to find their taxation in retirement was not as low as anticipated. Much of this is due to much lower deductions and requirements to make taxable withdrawals from retirement accounts. So what do you do?
Sometimes kicking the can down the road, when it comes to paying taxes, can be a good planning strategy. Allowing the gains on your accounts to grow with compound interest without the drawdown of annual taxes can lead to serious accumulation of wealth.
If you have ever received a tax form showing interest, dividend, or capital gain income on money you are reinvesting or currently not using, then you can probably relate. This is what I call being taxed on accident.
When you put together a tax-deferral investment plan it allows you to control when you pay your taxes, which is what I call being taxed on purpose.
It time to take control of your tax picture and start making the most of your hard earned dollars.
I would be happy to visit with you further about your specific situation. Feel free to give me a call or email email@example.com.