Tax Planning: The Art & Science of Paying Less

We recently hosted a “Tax Smart Investing Workshop” at our office.  Here are some of the highlights:

1. The taxes we pay today are likely less than the taxes we will pay in the future. The Tax Cut and  Jobs Act will sunset on December 31, 2025.  From an income tax perspective, married couples filing jointly are experiencing lower tax rates with this legislation.  We have little confidence that Congress will extend this legislation.   Why?  The Deficit.  Captain Obvious tells us the deficit is large and growing and unless the federal government goes on a significant spending diet, tax increases of some sort are on the menu.  See for yourself.
2. There are smart ways to pay less in taxes.  You can look at taxes like most accountants by seeking to pay less taxes in the current year.   Nothing wrong with this approach.  That said, at OnTrack we specialize in taxes (see our CPA) but instead of being myopically fixated on the current year, we believe the biggest winners are those who lower tax liabilities over the course of their lives and (if applicable) their children’s lives…
3. For non-retirement money, consider Direct Indexing.  It’s been around for decades and harnesses the power of “no cost trading” to conduct tax loss harvesting in both bull and bear markets.  If you want more information on Direct Indexing check out our video from our Between Two Fiduciaries series.  The best way we can explain the strategy is to say that Direct Indexing takes advantage of volatility in the market and creates a bank of capital losses that can be used to provide greater tax alpha – or better return than a benchmark (i.e., S&P 500) net of taxes.  It’s akin to playing a chess game when everyone else is playing checkers!  The results are  greater returns net of taxes.  
4. Paying taxes at the right time can save BIG $$$.  Most people have the largest percentage of their money tied up in a 401(k) or maybe Rollover IRAs.  These qualified retirement accounts are tax sheltered, but eventually the IRS says: pay up investor!  When you distribute the money out of these retirement accounts, you pay ordinary income tax on the distribution.  All of it!   There is no changing this fact.  But, when and how you decide to distribute can be a tactical decision that has massive implications for savings within your total portfolio and your beneficiary estate.  The tool that can help make a difference is the Roth Conversion.  When and how you execute the conversion is a deeper conversation that requires customized analysis.  In our Workshop we discussed a hypothetical 60-year old couple that could save more than $1 million in taxes during their retirement with properly timed Roth Conversions.  It’s not a far-fetched strategy. And no, it is not exclusively for the uber rich.

Thematically, we often talk about creating community in our blog.  Our “Tax Smart Investing Workshop” at OnTrack’s office was another win for community building! We had an intelligent group of clients and interested folks who joined us for 90 minutes and asked incredibly thoughtful questions.  We will hold more workshops for more people to attend absolutely free of charge.  In the meantime, let us know your investing or tax related questions.  If you have financial planning problems, we have solutions. SCHEDULE A MEETING at your convenience.  Cheers!