blocks that spell location

Location, Location, Location

In real estate, there is the saying: ”location, location, location.” We believe that the importance of location also holds true for the link between your investments and their tax nature. If you are younger than 55 and making more than $200,000 (single) and over $400,000 (married), this advice pertains to you. Yes, you need to be young and rich! Being thin would be incredible as well.

Location is paramount in real estate and critical in investment planning as well. However, tax strategy is often overlooked, although it can make all the difference if you have time and money on your side.

Can you control your tax bracket? To a certain extent, yes! There are some things you can do — especially if you have foresight.

There are three tax locations when it comes to investments:

Pre-Tax Location

Think of your 401k here. We like this now because we get a tax break, but in the future, it's highly taxation. At today's rates, in the highest bracket on the federal level, you lose about 42%.

Tax-Free or Tax Favored Location

Think of a Roth IRA or a Life Insurance Cash Value here. You may be thinking you make too much money for theRoth but keep reading for good news! Delayed gratification and focusing on the long game here is key to maximizing this location.

After-Tax Location

Think of your investment account here. Typically, it has more of a middle ground between the two others and is potentially more accessible.

Now, fast forward to when you are 65ish and you have maximized each location. It's the moment you have been waiting for, and your hard work and strategy of depositing into each location is going to pay off.

Planning is one of the only controllable items when it comes to your finances. Tax location can be (and should be) a part of that planning. We find that most people think they are going to be in a lower tax bracket when they retire. However, if they didn't plan for it, they typically aren't.

If you have the foresight to pave your way down these three roads, you will have greater control over your tax bracket in the future. Federal taxes are at an all-time low right now.The latest stimulus packages, adding trillions to the national deficit...I wonder, will we be in a higher tax bracket in the future?

There is opportunity for people that have already built up after-tax dollars in their 401(k)versus those who leave the after-tax dollars in their 401(k). The earnings on those are 100% taxation. If you convert over to a Roth Conversion IRA, you would pay the taxes at the time of the conversion, however, the earnings can compound tax-free!

I'm not a CPA (nor do I play one on TV), so consult one if you are interested in exploring this option. We are happy to work with you both to help ensure that your situation works for you. And, don't be surprised if the CPA isn't aware of this strategy. The ones I have pointed this out to did not know about it.

Do you have after tax dollars in your 401(k) or another employer plan? There might be opportunity for you to move into a Roth IRA instead. Do you have the ability to contribute after tax dollars to your employer plan? Most 401(k) plans now offer Roth accounts in addition to a traditional IRA.

We are often asked how to maximize tax savings with retirement plans and accumulating wealth. The strategy we employ works well with very high-income earners.

  1. Maximize the pre-tax savings to the 401(k).
  2. See if you are allowed to contribute after-tax dollars to your 401(k). If so, consider contributing to your Roth Conversion IRA annually.
  3. If you have an HSA, consider maximizing those contributions.
  4. If you have an investment account, find out if it is tax sensitive and if you are using strategies that offset capital gains. There is MORE you can do than simply tax harvesting and passive management to help you keep your tax dollars.
  5. Look intoCash Value Life insurance since it has the tax code 7702 as an advantage. Talk to us to see if this vehicle makes sense for your situation.
  6. Smile — you have reached tax nirvana. *Actually, there's even more you can do if you are charitably inclined, but we can talk about that later.

Tax diversification is imperative to controlling your taxes. Check your employer plan to see if you are contributing the maximum to your 401(k) pre-tax, and then if you may contribute more into after tax dollars (not Roth 401(k)).

Wouldn't it be wonderful to be able to pick your tax bracket when you are financially independent? Remember to take a long-term view with this type of planning.

Back to the topic of location, I will leave you with a quote about finding the joy in our lives no matter where we are physically. This seems more relevant than ever these days.

“There's danger in thinking joy is a matter of location. If we can't find joy where we are, we probably won&'t find it anywhere.
—Philip Gulley


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