If you’re still working, you are likely focused on your savings and investments strategy, so you can grow your wealth. In these situations, the focus normally is on your returns, year over year. However, this doesn’t take into account the easiest way to boost your investment returns: keeping more of your money via taxes. An often overlooked part of a saving and investing strategy, tax savings within your investments have enormous power to accelerate your investments. Keep reading to learn about some of the best strategies we use at REAP Financial to guide our clients to keep more of their wealth!
The Importance of Tax Mitigation for Your Investment Planning
You’ve likely heard the age-old adage, “it’s not about what you make; it’s about what you keep.” There couldn’t be a more true statement when it comes to your investment and income planning. At REAP Financial, we work with a range of clients, from those preparing for retirement to retirees. However, for every client, keeping wealth via taxes is the top way to boost acceleration toward retirement and retirement savings in retirement. With all retired clients, we always stress that holding onto more of your wealth allows you to spend more confidently and leave more money to your heirs or charities you believe in. The compounding effect of tax mitigation over the years can be massive, and it is something everyone should keep in mind.
One of the first ways families plan for tax mitigation is through Roth conversions. We have many resources on it, if you want to learn more, but the core idea is that you can convert pre-tax IRA and 401Ks to Roths. Once in a Roth account, that money can grow tax free without required minimum distributions. This is just one of the ways to hold onto more of your money through tax mitigation in retirement.
Managing “Ghost Income” and Dividend Taxation
Another way to optimize your tax mitigation is through looking at your “ghost income.” Generally on your 1040 tax form, lines 2 and 3 will display any interest and dividend gains; this is what we call your “ghost income.” With today’s interest environment, you can see good yield on CDs, money markets, dividends, and more.
Oftentimes, if you’re working, you just reinvest this ghost income, especially dividend income. Depending on what type of dividend it is, ordinary or qualified, there are different tax implications. Ordinary dividends are taxed at ordinary income rates, while qualified dividends are taxed at qualified dividend rates, which are favorable capital gains rates (15-20%) and generally lower than your income tax.
At REAP Financial, we hate to see anyone pay taxes on money they’re not using. If you look at those lines on your 1040 and you see lots of dividends or interest being generated, it may make sense for you to hold those types of assets in tax-deferred accounts, so that it doesn’t show up on your tax return as income. In retirement, your situation may be different. You may be living on that interest gain or dividends. If you are, it can make more sense to hold those assets in an after-tax brokerage, since they’ll be taxed at more favorable capital gains rates if you hold them for twelve months or longer. You should take this into account when planning your savings and investments, especially in your highest earning years when it has the greatest impact.
Crafting Your Investment and Income Plan with a Tax-Lens
When you think about your retirement planning, you likely think about the S&P and optimizing towards double-digit returns on your investments. While that’s wonderful, it is just as important to make a plan to hold onto as much of those hard-earned returns as possible. At REAP Financial, this is what we do best. We help compose an investment and income plan that has a tax-lens on top of it, so you can optimize every aspect of your financial world.
If you want to learn more about our strategies, grab a copy of our Roth Decision Guide. This free resource will help you learn ways to mitigate your taxes and get control of your retirement fund. It is updated for 2024, so you’ll have all the best learnings. To get your free copy, simply send an email to retire@reapfinancial.com.
Austin Texas Financial & Retirement Planning Services
At REAP Financial, we focus on designing customized financial plans for clients in and around Austin that cater to your distinct financial objectives and lifestyle goals. Allow us to guide you through the intricacies of preparing for retirement to secure a stable and fulfilling financial future. Contact us for a consultation and begin your journey toward a serene retirement in Austin.
Phone: (512) 249-7300
Main Office Address:
REAP Financial
9414 Anderson Mill Rd #100
Austin, TX 78729
