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Happy 4th of July! A History Lesson in Taxes and Being Tax Diversified

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First of all, I’d like to wish everyone a Happy Independence Day! We are all very fortunate to live in the USA. This time of year reminds us how far we have come as a nation – and how lucky we are to have the history we do. I’m reminded of an exhibit I saw in Washington DC at the Smithsonian a couple of years back, which was a map of major world inventions and innovations. Despite the USA being less than 5% of the world’s population, we have been responsible for the lions share of major and critical inventions over the last 200+ years, creating a better world for all humankind. I’m proud to be an American for so many reasons.

A Brief History In Tax Rates

With much of the recent talk being about reducing taxes with a new Administration, I think it’s important you know where we have been historically from a tax perspective, and where we likely are going.

Let’s recap a few major dates and maximum personal tax rates :

  • 1910 – The rate was less than 10%
  • Immediately following WW2 it increased to 94% to help pay for the War
  • In the late 1970’s under President Carter, we were still about 70%
  • When President Reagan left office in 1988/89 we were at 35%
  • Currently we are matching the top rate from the President Clinton years of 39.6%

Another consideration here is the fact that the US deficit is approaching $20 TRILLION dollars – source

Given the reality of history and the growing deficit, I believe taxes will go up significantly even if we have a short-term reprieve under President Trump.

Become Tax Diversified

Let’s break assets down into 3 broad categories:

  1. Qualified Assets – these are 401k’s, IRA’s, pensions – money has gone in without tax but will be taxed eventually when it’s taken out
  2. Capital Assets – Real Estate, Stocks, Mutual Funds, Businesses  – if properly planned around these can be taxed at favorable capital gains rates
  3. Tax-Free Assets – Roth IRA’s (or Roth 401k’s), Municipal Bonds, Life Insurance Retirement Plans

Most people are focused on 2 buckets – Qualified and Capital – often bucket 3 is ignored or under-utilized. We must focus on getting as much as we can into the tax-free bucket within the guidelines the IRS allows.

One of the best, if not the best, planning tools around is the Roth IRA – however, the government recognizes this as well as limits how much you can put in depending upon your income, see – so if you are in the boat of many people, you can’t fund it each year.

Municipal bonds are great, but returns are very low so these are not very attractive when you should be achieving 5-7% returns at a minimum.

Life insurance contracts are expensive and usually favor the life insurance company and/or the selling agent. They have also garnered a bad reputation over the years (and in most cases rightfully so) because of the high cost and low returns.

Now that I’ve pointed out the negatives, I’d like to shift that focus to what does work. We believe that approaching all 3 buckets with a strategic plan is the right way to go. Fortunately, we have identified planning approaches that allow us to better diversify not just from a generic investment perspective but from a tax perspective. In working through a plan to review your goals and values, we can properly allocate funds to each bucket to ensure we are more efficient in tax savings today, but more importantly, tax savings every year for the rest of your days!

Schedule a time to talk today and we can discuss this directly as it relates to your personal situation. Turn your equity into a proper plan. Free 15 minute consultation:

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