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Tax Savings or Investment Gains?

Tax Savings or Investment Gains?

May 17, 2023

Why not both?

I get asked from time to time why do I have a lot of tax topics when I am a financial advisor.

There are a variety of reasons, partly because I’m also a CPA so talking about taxes is an occupational hazard.  Partly because other financial advisors aren’t talking about it even though tax is involved in every financial plan.

Another key one is that investment choices are a matter of opinion while taxes are a matter of fact.

By that I mean that there are thousands and thousands of investment choices out there in the market place.  Some good in that they help you meet your financial goals and others not so good because they don’t fit you and your financial goals, even though they might be a shiny object that is trying to capture your attention (and dollars).

But taxes are real and they are one of your largest lifetime expenses.  Some people pay more in lifetime tax than they pay in mortgage or rent payments.

 Let’s say your family taxable income is around $75,000 per year and you have 30 working years before retirement and under current federal tax rates that has you at around $9,000 tax per year (federal).

$9,000 times 30 working years is $270,000 of federal tax you will pay across those years earning a paycheck.

Then if you have any pretax money set aside for retirement IRAs, 401Ks), even in retirement you will pay tax on money you receive from your retirement accounts.

So yes, earning investment gains is important over your lifetime and there are a myriad of choices from which to do that, but financial advisors cannot guarantee a profit, no one can predict the future.

I do help my clients look at if they are in the right asset allocations given their financial goals, but we cannot control the market, it will go up or down based on other world events.

However you really will pay tax dollars out of your bank account into the government’s bank account.  That will happen whether the markets are up or the markets are down.

So legally minimizing taxes that you owe is also critical to long term wealth building because that money stays in your pocket for you to redeploy towards achieving your financial goals. 

 Those tax savings might be used in a more short term manner to help you buy that shiny new electronic toy that will be outdated soon, or you get to have dinner at Ruth Chris steakhouse instead of Jack In The Box, or to be honest hopefully you will work with me and redeploy some of those savings into your long term financial planning goals.

First you need to determine what those goals are, remember that you need a target (goal) if you want to aim and hit that target.

Then look at what you have and what opportunities exist and what opportunities might exist if other changes were to be made.

Perhaps you need to give up something or reduce doing something with more immediate gratification in exchange for a longer-term satisfaction.  See the Latte article here on the Blog page .

Many folks don’t really think about tax savings or even know how much they pay in tax because it comes out of their paycheck, and they just see the net check they get to take home.   That’s why I encourage you to look at the total tax you owe for the year and the extrapolate out how much more you might reasonably be paying in the future if you take no action.

Odds are it’s a bigger amount than you realized and now is the time to start looking at what can be done to mitigate it both in the short term and much further into the future.

The information in this and other articles is intended to be educational in nature only.  Not tax, legal or investment guidance for you specifically.  Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.