TAX EFFICIENT INVESTING
You work to earn money. Hopefully your work does more for you than just that, but ultimately that’s how you finance your life and legacy. At some point – the sooner the better - you want to put your money to work earning money so that you can work less and enjoy your life and family more. That is investing. Eventually, you want your money to be doing all of the necessary earning so that you can do all of the desired living. That is successful retirement. The more money you have working the more it can earn, thereby recruiting more money to the cause and getting you to the goal faster. That is compounding. But just like the tax gang demands their quarterly shake-down of protection money when you’re working, they demand the same of your money when it’s working. The more you earn, the more your government is entitled to.
That is why with investing, structure and strategy are just as important to your success as what you’re actually investing in - sometimes more so. A thousand shares of your favorite bio-medical stock held in an IRA will give you a different total return than those same shares in a Roth IRA and different still if held in a non-qualified brokerage account. The difference is taxes. Growth in your investment income is considered by the IRS to be taxable income. When the tax is wrested from you, and at what rate it is assessed depends on what kind of investment account your portfolio is in, when you sell an investment, and even what you do after you’ve sold something. Income can be fully taxable, tax-deferred, or tax free depending on what you own and which account you keep it in. Earned income is taxed different from un earned income. Capital gains are taxed different from dividend income or interest income Long term capital gains are taxed different than short term capital gains. Tax rates can be 15% or 28% or 40% depending on when you liquidate and even on what you do next with the money you've earned. There are tools and strategies that can protect you when used correctly; 1031/1035 exchanges, municipal bonds, Master Limited Partnerships…to name a few.
A strategy that makes sense for you and your family won’t likely work for your neighbor or your brother. That is why working with a financial planning professional who knows tax strategy is important. Yes, you can manage you own investment portfolio online. You can buy and sell investment real estate or be a landlord without the help of an investment advisor. Even if you do these things successfully, (especially if you do these things successfully) you will still find yourself staring down the barrel of the tax man's gun. Managing those perils is best done with professional consultation. Getting it right from the beginning is best. If you’re under thirty and earning good money, start now. If you’ve already started making your mess, it’s not too late to get some help and correct your course. If you haven’t started doing anything, you have actually started making a mess. Do something positive and proactive now – like contacting Family Financial Management Practice.
"A strategy that makes sense for you and your family won’t likely work for your neighbor or your brother."
Nobody wants their legacy to be about how much they paid in taxes during their lifetime. Every dollar ceded to the tax gangs is a dollar not put to use making the better world to which you want to contribute.
William S Jiggetts