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October 9, 2018 5:00 am
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.
Click the link for more in-depth reading in a recent blog post: https://mrstillmansopus.com/retirement/three-tax-tips/
There is no no for Mr. Stillman's opus with John Stillman of Rosewood wealth management and today John is going to talk about three, and tax mystics John looking forward to hearing so tax mistake number one and there.
Actually we could just study the life of Willie Nelson and come up with some pretty interesting tax mistakes. My favorite Willie Nelson tax mistake he'd done something with buying cattle. I can't remember exactly the details but some tax advisor had told him that he could ease cattle as a tax shelter and I don't know for whatever reason, it wasn't the deduction that he thought it was going to be in. This was one of the first times a day ever found himself owing the IRS money was because he thought this cattle was a tax shelter and it was not okay gets abetted by some of the words anyway.
That has nothing to do with what were talking about today as that is not going to apply to most people, so tax mistake number one. I see this one all the time and it's just something it's a mistake because people don't ever think about and that's not investing aggressively enough in your Roth IRA symbol. What does that have to do with taxes you're talking about investment choices.
Well, let's think about what the Roth is the Roth is an account where all of your money is growing, tax free, so we put in $5000 in gross to 50. We can take out 50 without paying any taxes and are paying taxes on the gains nothing taxes on any of the growth that's the power of the Roth and so what I see a lot of people do is welcome in the bring other statements and will have a couple hundred thousand in IRA half-million in their 401(k) and maybe 100,000 a Roth okay the 401(k) and the IRA are both invested pretty aggressively right there paying attention to it, trying to maximize their growth and they have the Roth just sitting in cash-based like sitting in a money market fund, or something else because they're not thinking about why they're using the Roth.
It's just that somebody told him while behavioral should be contributing to Russellville put their 5500 or 6500 a year into the Roth and think okay well I'll of invest that at some point in the next thing you know you contributed to the raw for 15 or 20 years and never really got around to paying attention to the investments. The problem with that is if we just put money in cash in a Roth we not experiencing any that tax-free growth. The Roth gives us the opportunity to have so if you put in $5000 and it grows to $5200 well big deal. You know, we have accomplished much all that tax-free growth we we just didn't take advantage of it.
So generally speaking, in most of our plans and this is not always the case.
There are exceptions. If we need for tax planning purposes, but for the most part we want the Roth did be the most aggressively invested account that you have. We want that to be the last money you touch because the bigger we can make that account.
The more tax-free dollars you've accumulated for yourself so that's one that we want in a lot of cases shakeup the way that you've invested such like everybody else for so many people look at it. Just the opposite way.
It's the least aggressively invested yet and I it's not like they have a strategy behind that.
That's just that's kind of how it's happened for whatever reason so that brings us to mistake number two which is withdrawing from the wrong accounts in the wrong year so what we mean by that. What were talking out when you're retired. And let's suppose that you need $120,000 of income. So part of that hundred $20,000 is going to be your Social Security actually for whatever other money you need. We don't want to just take all of that money out of a 401(k) or an IRA. Why is that well because if you look at your tax brackets.
Your first roughly if if your married filing jointly your first hundred thousand dollars or so of income is going to be in that 12% tax bracket. If you take out more than that, from an IRA or 401(k). It's going to be in the 22% tax bracket so that means our first hundred thousand dollars will of paid 12% on the next 20,000 that were taking out in the scenario with paying 22% on presently have an after-tax account where we can just sell some stock or sell some mutual funds and just pay capital gains on that were going to be a much lower tax rate overall to generate that income that if we took it out of a 401(k) or an IRA frustrates me to no end how little communication there often is between financial advisor client, and if there is a CPA or tax preparer involved how little communication there is between these three people about this tax planning, stuff, and we do a lot of this kind of tax planning here because I feel it's important, and very often we are having the conversation were coordinating with clients, CPAs, to be sure, making the best choice. We can but so often across industry. I see these conversations not happening and it's it's so important, not just what you invested.
It's when you take money out of certain accounts in certain years and we have to be really careful about that. When were putting together your retirement income plan.
Most people don't get that any thought at all.
Welders are to tax tips for her for all of us and that sounds like you know these are insights that most people just don't have John bring them in. A lot of those things you just talked about. I really thought about and I'm betting that a lot of people listening to this there are in that same category.
Yeah there's a lot of things in the financial world works like your thinking about it wrong and we need to change your thinking.
But very often.
With this tax planning stuff. It's not your thing about it wrong. It's just that you're not thinking about it's never even crossed your mind. Probably this is something I should consider so just something you will be paying attention to. So is meatloaf work said two out of three ain't bad, but once the texture is very loose meatloaf quote so the last thing is not understanding the inefficiency of the tax and efficiency of mutual funds, so you never notice this at all.
If you have mutual funds in your 401(k) or your IRA this. This isn't an issue. This conversation doesn't apply, but if you have mutual funds in an after-tax account.
If you bought mutual funds with after-tax money. You'll notice that every year you're going to have some sort of tax liability with those mutual funds. And here's why. Let's see you in a stock ticker stock you will goodbye name of company Apple you want to go buy some Apple and let's say you you bought Apple at hundred dollars a share.
Okay. And as we record this, let me just check my stock ticker now will see where Apple is so fly folks Apple right now is at 229 share you bought it at 100 share. It's now at 229. That means if you turn around and sell Apple you have $129 of capital gains. You'll pay taxes on those capital gains but the thing is, you were in control of that transaction you sold the stock whatever you wanted to, and you're going to pay those capital gains if you will, mutual fund. The fund managers within that fund are constantly buying and selling within their management of the fund and you don't have any control over. You have no control over when you buy and sell and as their buying and selling their creating capital gains very often. And as someone who's invested in that fund, you're going to have to pay your share your proportional share of those capital gains so again if you have money in an after-tax account very often much more efficient if you invest in ETF's, which are a lot like mutual funds, but they don't have this tax inefficiency that mutual funds that now is that to say that you should never ever invest in mutual funds in an after-tax account no were noticing that because there are cases where it makes sense if we need a particular funded to do a particular thing but in general if you're just looking for a sort of a buy-and-hold strategy, mutual funds in after-tax account are not the best idea although it makes perfect sense. Thanks for explaining that if all the things John just talked about some interesting to you and if you would like to follow through on some of these insights they get in touch with John Stillman at Rosewood wealth management Rosewood wealth management.com that is Rosewood wealth management.com and you can find out more.
John Stillman would be happy to talk with you and help you with these tax ideas. Three of Borges will whatever you John Stillman, Rosewood wealth management you're listening to Mr. Stillman's opus