This week’s article was originally going to be sent about a month or so ago. A pandemic changed those plans. Although we are not out of the woods yet, I wanted to at least get back on track with my plans. And you might be wondering what those plans are. Well, to start a series of articles on everyone’s favorite topic – TAXES!!!
For the next few months, I will be diving deeper into tax-related topics. You may be wondering why. Well, it’s really simple. It’s not what you make. It’s what you keep! That may be a bit too cliché, so instead how about the fact that taxes are the single largest drag on performance for investors over the long term. It’s true that if unchecked taxes can reduce an investor’s returns by as much as 60%. Yikes!
While it is key to focus on things like asset allocation and fees, taxes have as much if not more of an impact than these two. The big difference is people take the time to understand asset allocation and look at their fees, but often ignore taxes when it comes to achieving their financial goals. For example - One of the biggest errors is people assume taxes will be lower in retirement. Heck, you’d be shocked at how many conversations I’ve had with people over the years who think they don’t have to pay taxes at all once they retire. But I digress.
Tax-smart investing is something that is not just for the ultra-wealthy. There are lots of small things that happen over time impacting investors at all levels. Activities such as rebalancing, changes in portfolio composition, change in managers, or even a client withdrawal create the insidious side effect of taxes. While we focus on gains, which are good, we also need to recognize what our after-tax gain is. You know, what an investment earns after taxes (and fees and inflation too).
Another factor that comes into play is the US tax code, which is always changing. We had a major update a few years ago and much of that will be sunsetting soon. And who knows what will be happening to future taxes as a result of all the government intervention and stimulus connected to the pandemic.
But enough of that right now. Over the coming weeks I will be touching on some familiar topics such as Roth 401ks and Mega Backdoor Roths. I will also cover areas including asset location and how to integrate tax management. Odds are many of these “articles” will actually be videos as I need to show some board work with them. So, stay tuned and enjoy a spring of tax-related education. And what better time to talk about taxes then when everything is turning the color of money😉