"Anyone may so arrange his affairs that his taxes shall be as low as possible... there is not even a patriotic duty to increase one's taxes."
- Judge Learned Hand
What is the single greatest expense you’ll pay in your lifetime? For most people, the correct answer is taxes. While many overlook the importance of tax planning in creating a financial plan, we believe it is an essential ingredient to creating long-term financial independence.
There is a substantial difference between tax planning and tax preparation. Tax preparation is what we do every year in the spring as we work to complete our tax returns. We use deductions, credits, exemptions and exclusions to minimize the effect of the W2s and 1099s we have already received.
Tax planning, by contrast, is much more powerful. Tax planning looks to the future and makes calculated decisions that evaluate how much tax you pay today, versus how much you might pay tomorrow.
Unfortunately, the future of our tax system is extremely uncertain, so to a large extent we are shooting at a moving target. Tax planning should address the following:
1. How to minimize taxes on investments
2. When it may be a good thing to trigger a tax today in order to save on tax tomorrow
3. To Roth or not to Roth?
4. How to use tax diversification to bolster your total after-tax dollars in retirement
5. Understanding Required Minimum Distributions (RMDs) for your retirement accounts
6. How to use the concept of “tax alpha” to bolster after-tax return
7. How to evaluate the potential benefit of Roth conversion in your 60s to minimize the effect of Required Minimum Distributions (RMDs) at age 70 ½
Paying taxes in retirement can often times be very intentional. At Brogan Financial, we carefully evaluate the short and long term effect of taxes on your financial plan, and work with you and your tax professional to help you devise a strategy to maximize your net after-tax dollars.