Most hard-working Americans grimace at the thought of April 15th each and every year. No one likes to pay taxes, and yet, despite the constant bickering coming from our nation’s capital, our tax code perpetually seems to have more twists and turns than an Agatha Christie novel. Nowhere is that notion better exemplified than a quick look at the many different layers of taxes an invested dollar might face over its effective lifespan.
The Taxed Journey of Your Money
Let’s take a look at a couple of brief hypothetical scenarios to demonstrate the many instances your invested money faces the taxman in one form or another. Since most people are familiar with a 401(k) or other types of employer-sponsored retirement plans through their work, it’s probably best to start there.
This is the most straightforward of the scenarios because the money you invest through a 401(k) doesn’t get taxed when you earn it as your other employment income does. Contributions to your 401(k) are contributed on a pre-tax basis, and therefore hit the retirement account before Uncle Sam can get his hands on it. That money isn’t taxed until you begin taking distributions once you retire.
On the other hand, investments in a non-retirement account are the ones that take the biggest long-term hit from taxes. For instance, say you open an investment account with a mutual fund company that is meant to help you save for the cabin you’ve always dreamed of. That money is taxed as you earn it through your employment and then taxed again on an annual basis through the investment company due to any dividends or taxable interest it might accrue. When you finally sell those investments, that money will be taxed once more on any capital gains you realize at the point of sale. In other words, every dollar you have placed in that account is taxed three times: when you earn it, invest it, and ultimately sell it.
Use Tax-Efficient Investments
Unfortunately, the impact of taxes isn’t nearly as simple as giving Uncle Sam money that you would otherwise keep. When you factor in the loss of exponential growth into the equation, the negative impact of taxes becomes even more consequential.
While taxes might be unavoidable, that isn’t to say you are helpless against them. We can help you identify tax-efficient solutions that suit your needs – including retirement accounts like IRAs, municipal bonds, ETFs, and lower dividend-yielding stocks. Although none of these solutions will completely eliminate taxation from your life, using a deliberate approach that takes advantage of the different tax-efficient investment vehicles available is a great way to keep more of your hard-earned dollars in your pocket and out of the hands of the taxman.
Would you like to review your portfolio for more tax efficiencies or need help with your financial plan? We’re here to help! Simply click here or call (763) 445-2772 to schedule a complimentary consultation today!