Three Tax Tips

Three Tax Tips

The Prelude:

On this edition of the podcast, we’ll share with you three tax tips. Specifically, we’ll help you avoid making three crucial tax mistakes.

The Bass Lines:

Tax Tips: Invest Aggressively In Your Roth IRA.

  • [1:00] – Many folks don’t invest enough in their Roth IRA. A Roth IRA is a qualified retirement account that allows your money to grow tax-free. You put $5,000 in it, it grows to $50,000, and you don’t have to pay a cent on the growth or the gains. So many folks come in to see us with the bulk of their money in a 401(k) or traditional IRA. Maybe they’ve put money in their Roth, but it’s sitting in cash. This happens because folks don’t stop to think about why they’re using the Roth. They just do it because someone told them to open a Roth. Pay attention to how your money is invested. Your Roth gives you the opportunity for tax-free growth. Don’t miss out.

Tax Tips: Don’t Withdraw From The Wrong Accounts In The Wrong Year.

  • [3:45] – Let’s suppose you’re retired, and you need $120,000 of annual income. Some of that money will come from Social Security. As for the rest, don’t make the mistake of withdrawing it all from a 4o1(k) or an IRA. If you look at your tax brackets (let’s assume you’re married, filing jointly), your first $100,000 or so of income is going to be in the 12 percent tax bracket. After that, you’ll be taxed in the 22 percent tax bracket, so the aforementioned $20,000 would be taxed in that bracket. However, if you have an after-tax account, you’ll pay a much lower tax rate to generate this income. Of course, it takes a bit of communication between your advisor, your CPA, and yourself to accomplish this goal. Remember to consider the tax ramifications of your investments.

Tax Tips: Understand The Tax Inefficiency Of Mutual Funds. 

  • [6:27] – You’ll never notice this if you have mutual funds in your IRA or 401(k), but if you own mutual funds in an after-tax account, you’ll notice that every year you’ll have a tax liability in those funds. Let’s say you bought Apple at $100 a share. Apple is currently at $229 a share. That means if you turn around and sell Apple, you’ll have $129 in capital gains, and you’ll pay tax on those gains. However, you have control of that stock, and you’ll pay accordingly when you sell. If you own a mutual fund, the fund managers of that mutual fund are constantly buying and selling within their management of the fund. You have no control of the fund. As they buy and sell, they’re creating capital gains, and you’ll have to pay your share of the taxes on those gains. If you have money in an after-tax account, it’s most likely more efficient to invest in an ETF. Of course, we’re not saying never to invest in mutual funds in after tax-accounts, but generally, if you’re incorporating a buy and hold strategy, you don’t want mutual funds in that type of account.

The Crescendo:

The Encore:

The host: John Stillman – Contact – Book – Call: 919-391-3446