Reducing Taxes through Prudent Investment and Wealth Management

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Is your investment advisor and mutual funds costing you $ 000's in taxes over a lifetime? Find out now

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Reducing Taxes through Prudent Investment and Wealth Management

  1. 1. Controlling Taxes How to reduce the cost of investing with a diligent and effective tax management program Tax Management creates Wealth Management Personal Financial Experiences, LLC and J.C. Corrigan, CFP® Presents www.myfinancialstrategies.com
  2. 2. What can’t I control with investing and taxes? <ul><li>Tax Rates </li></ul><ul><li>Mutual Fund Distributions and Re-balancing </li></ul>
  3. 3. What can you control when it comes to taxes with my investments? <ul><li>Deductible Expenses </li></ul><ul><li>Re-balancing </li></ul><ul><li>Converting from Tax Deferred To Tax Exempt </li></ul><ul><li>Impact on Return </li></ul>
  4. 4. Deductible Expenses <ul><li>Investment Advising Expenses are tax deductible </li></ul><ul><ul><li>Itemized Deduction, Schedule A, Line 23 </li></ul></ul><ul><ul><li>Amount over 2% of AGI </li></ul></ul>
  5. 5. Example of an annual tax benefit <ul><li>Gross Income: $180,000 </li></ul><ul><li>AGI: $140,000 (25% tax bracket) </li></ul><ul><li>Taxable Income: $115,000 </li></ul><ul><li>Invested in our portfolio: $450,000 </li></ul><ul><li>Annual Expense: $6750 (1.5%) – Schedule A, Line 23 Itemized Deduction </li></ul><ul><li>2% of AGI: $2800 </li></ul><ul><li>Tax Deductible Amount: $3950 (6750 – 2800) </li></ul><ul><li>New Taxable Income: $111,050 </li></ul><ul><li>Realized Tax savings: $988 </li></ul><ul><li>Realized Annual Expense reduced from 1.5% to 1.28% </li></ul>Mutual Fund Expenses Are NOT DEDUCTIBLE!
  6. 6. Rebalancing Example Taxable (150K) Tax Deferred (300K) Total (450K) VTI $91,425 56.5% $182,850 56.5% $274,275 56.5% VEU $10,500 6.5% $21,000 6.5% $31,500 6.5% IEF $55,500 34.3% $111,000 34.3% $166,500 34.3% CASH $4,500 2.7% $9,000 2.7% $13,500 2.7% Total $161,925 100% $323,850 100% $515,775 100% TARGET WEIGHTS: VTI = 53% VEU = 7% IEF = 37% CASH = 3% Assume VTI Grows By 15%, Other Positions Are Flat, So VTI Is Now Over Weighted
  7. 7. How we rebalance Taxable Tax Deferred Total VTI $91,425 56.5% $166,135 51.3% $257,560 53% VEU $10,500 6.5% $23,641 7.3% $34,141 7% IEF $55,500 34.3% $124,035 38.3% $179,535 37% CASH $4,500 2.7% $10,319 3.1% $14,819 3% Total $161,925 100% $323,850 100% $485,775 100% TARGET WEIGHTS: VTI = 53% VEU = 7% IEF = 37% CASH = 3% Simple, Lost Cost Rebalacing One Sell , Two Buys and NO Taxes, Cost = $27
  8. 8. Few Managers and No Mutual Funds put in the effort to meet your needs and tax efficiency first Taxable Tax Deferred Total VTI $85,820 53% $171,640 53% $257,460 53% VEU $11,335 7% $22,670 7 % $34,005 7% IEF $59,912 37% $119,824 37% $179,736 37% CASH $4,858 3% $9,916 3% $14,774 3% Total $161,925 100% $323,850 100% $485,775 100% TARGET WEIGHTS: VTI = 53% VEU = 7% IEF = 37% CASH = 3% TWO Sells , Four Buys and $1840 in Taxes and Commissions
  9. 9. Converting from Tax Deferred to Tax Exempt <ul><li>Recent change in tax law allows converting from Tax Deferred to Tax Exempt </li></ul><ul><ul><li>Pay Taxes above the cost basis today </li></ul></ul><ul><ul><li>Not always a good idea </li></ul></ul><ul><ul><li>Three times to use this strategy, based on your situation </li></ul></ul>
  10. 10. Conversion Tactic 1: Sharp Pullback <ul><li>IRA is worth $100,000, Household income is $100,000 </li></ul><ul><ul><li>30% Pullback and the IRA is worth $70,000 </li></ul></ul><ul><ul><li>Convert now and you would owe taxes on the $70,000 (approximately $18,500) </li></ul></ul><ul><ul><li>Market rebounds to $100,000 and you have saved $9000 in future taxes and possibly more if rates went up. Tax savings increases as market goes up more. </li></ul></ul>
  11. 11. Conversion Tactic 2: Net Zero <ul><li>IRA is worth $100,000, expecting a $5000 tax refund </li></ul><ul><ul><li>Convert $20,000 of your IRA to a Roth IRA so that you don’t pay taxes out of pocket, but you don’t get a refund either </li></ul></ul><ul><ul><li>Over 10 years, this would save over $5000 in future taxes </li></ul></ul><ul><ul><li>Continue this process each year until IRA is fully converted to a Roth IRA </li></ul></ul>
  12. 12. Conversion Tactic 3: Tax Credits On the Table <ul><li>$300,000 IRA, make $30,000 a year </li></ul><ul><ul><li>Your deductions and tax credits can’t be harvested because you tax liability is 0 </li></ul></ul><ul><ul><li>Move Traditional IRA money to a Roth IRA up to the amount so that your tax liability remains 0 </li></ul></ul>

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