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Maximizing Wealth: 3 Ethical Ways to Slash Your Tax Bill

Season #2

Navigating the tax world feels a lot like solving a crazy complex maze. But get this, wrapping your head around tax strategies is a must if you want a top-notch retirement.

Alright, we all know it's our duty as good citizens to chip in to the big pot of public money. But don't forget, it's totally okay to aim to pay the minimum tax you can. Good ol' Ben Franklin said it best: we all have to pay our fair share of taxes...and not a penny more.
Less Tax? Yep, That's Patriotic Too

Paying Less Taxes is Patriotic

See, the way the tax code is set up isn't just random. It's designed to encourage certain behaviors that make our country tick. This sneaky trick has kept our economy chugging along nicely. It's one of the reasons why we've got 24% of the global economy even though we make up less than 5% of the world's population!

Think about the IRS Tax Code like a money-moving machine, shuffling cash to places where it can do a world of good for our economy. Congress makes this happen using a cocktail of tax incentives, deductions, credits, you name it...and the fat cats, they've got this down to a fine art.

As retirees living on a fixed income, we need to be just as crafty when it comes to our own retirement. It's all about hunting down ways to be tax-efficient with our money.

Ways To Pay Less Taxes in Retirement

Strategic Roth Conversions

The moment we say bye-bye to our regular jobs all the way until we hit 75, there's a golden window that opens up. You might spot it somewhere in your sixties, maybe when you're slowing down to part-time, or even when you've ditched work altogether to embrace retirement.

This golden window, my friend, is when you can dictate your income, and more importantly, the part of your income that the taxman gets his hands on. Yep, you heard it right! There's a 0% tax bracket where you earn and yet pay nada. Then there's the 10% and the 12% tax brackets. They might not be zero, but they're low enough to not leave a hole in your pocket.

Here's the kicker. If you're smart and you opt for Roth conversions, you pull out your money and pay your taxes right then and there. But here's the beauty of it - you're paying on your own terms, not on the whims and fancies of Congress. You see, if you don't get this done, the moment you blow out the candles on your 75th birthday, you're gonna have to start emptying that account, and at a rate and time not chosen by you, but them. And this system, my friend, is designed to milk your account dry within your lifetime.

Imagine being in your eighties or nineties and having to yank out 25, 30, 40% of your account value! Ouch, right? And the worst part, you're gonna end up bumping yourself into one of the highest tax brackets, possibly the highest you've ever been in your whole life. So, you do want to cough up taxes, but you wanna do it on your terms, savvy?

Oh, and don't forget about capital gains, another nice way to keep your hard-earned cash away from the taxman.

Harvesting Your Losses

When the market takes a nosedive, that's when you jump on tax loss harvesting. Shift that dough from your retirement account into your brokerage account or a Roth account. And sure, you gotta pay taxes, but here's the trick - you're doing it when the market is low, so you're paying on a smaller chunk. Or, if you've got a brokerage account that's not tied up with retirement, you can use those losses to balance out your gains.

Let's be honest, there's a ton of tiny details in the tax code. And it's always changing, like some kind of shapeshifter. But trust me, if you get your thinking cap on, you can absolutely shrink your taxable income, and the tax bill that comes with it, down to the bare minimum. It might not hit zero, but you can get darn close.

What Is Tax Loss Harvesting

Let's break down tax loss harvesting a bit, 'cause it's a nifty trick and I want to make sure we're all on the same page.

So, you know how the market's basically a rollercoaster, right? There's gonna be epic highs and terrifying lows. But remember, when the market's down, that's just relative to when you bought in. So when the market takes a dip and you spot, let's say, a $10,000 loss in your account, guess what, I'm stoked!

Why? Because I know the market's bound to bounce back and my star will rise again. But here's the genius part - I can sell that loss, invest the money in something different that has the same potential to grow. It's like a clever game of switcheroo.

Beware of The Wash Sale Rule

But here's the catch, it can't be what the IRS labels as "substantially similar". For example, say I've got shares in the S&P 500 with Vanguard, I can't just jump ship to iShares S&P 500. But I can mix things up, like switching from an S&P 500 value to an S&P 500 growth. Trust me, it makes a huge difference.

Or, how about going from having an S&P 500 to the individual sectors, right? I'm still riding the S&P 500 wave, but now I've split it into 10 different rides instead of one. By doing this, I'm setting myself up for that sweet recovery when the market bounces back. That $10,000 loss? It's just a paper cut.

But here's where it gets interesting. By harvesting it, selling and realizing that loss, it pops up on my tax return. And having it on my tax return means $3,000 of it can offset my ordinary income. Doesn't matter if it's social security, required minimum distributions, Roth conversions or my salary, it can offset $3,000 of it.

And here's another thing, when I've got gains in my account and I'm selling them off to live on, or I'm selling off that property we chatted about a few episodes ago, those capital gains can be offset by these capital losses I'm reaping.

But hold up, here's a heads up. Tax loss harvesting isn't a free-for-all. You gotta make sure you're playing by the rules Congress and the IRS laid out. But when you do it right, it's a dynamite strategy for chopping down your taxable income, no matter what your tax bill looks like.

So, seriously, give it a shot. And start looking for ways to tweak your lifestyle and decisions so they're tax efficient. There are a ton of ways to do the same thing, just better.

Which Account You Use Matters

Take dividend income, for example. A lot of people are into buying dividend stocks or dividend ETFs.

You probably think you've got it sorted in your brokerage account. Nope, you're better off having those in your retirement account to avoid paying extra taxes on it. It's pretty shocking how often I see folks shelling out thousands in taxes just because they're storing it in the wrong place.

So, your aim should be to make everything as tax-efficient as possible. Your portfolio, your lifestyle, your financial decisions, all of it. Make every penny count!

Hire a Tax Planner!

Most accountants and tax-prepares are not doctors. They are basically coroners, conducting an autopsy on the past year's financial mess. But here's the thing - it's too late to change anything now. Tax loss harvesting? It's a moot point. You can't do anything about it now. This is why you just can't drop off your taxes somewhere and expect miracles.

What you need is a bit of teamwork. Your financial advisor should be working hand-in-hand with a tax planner or tax advisor, someone who can look at your situation and make recommendations.

Now here's the thing, not every financial advisor can give you tax advice.

It's crucial to ask your advisor a couple of key questions.

First, can they give you tax advice?

Second, are they always acting as a fiduciary in your best interest? If the answer is no to either, then it might be time to look for a new financial advisor.

Think about it. If your advisor can't give tax advice, you're potentially leaving money on the table. In fact, many people can make more money saving on taxes than they can investing in the market, especially when they're in retirement.

And on the fiduciary front, if they're not always acting in your best interest, then there are times when they're putting their interest first. Sure, their interest might line up with yours, but sometimes they can switch hats, and they're not obligated to let you know which hat they're wearing.

Now back to your tax preparer. Their job is to look at what you've done in the past and find all the possible tax savings. But they're not going to be the ones to tell you how to adjust your behavior to save more money next year. That's my job.

As a financial planner who specializes in taxes, and as an enrolled agent with the IRS, I'm always looking at how we can modify behaviors to save more money down the line. So, the point here is - get your team together, and make sure they're working in sync. That's how you keep more of your hard-earned money in your pocket.

The goal is to make your portfolio, your lifestyle, and the financial decisions you make as tax efficient as possible.

Paying taxes is a civic duty, but it doesn't mean you can't take steps to ethically reduce your tax bill. By understanding and applying the tax code's incentives, you can maximize your wealth while contributing to economic growth. Make a plan, explore tax-efficient behaviors, and work with trusted professionals to ensure long-term financial success. Remember, tax planning is not a seasonal affair, but a year-round commitment to optimizing your finances.