We continue to stay busy behind the scenes here at Harford Financial Group. Every day we are working harder to deliver higher levels of service to our great clients like you. We are committed to holistic financial planning that covers the 5 principles of financial planning this includes: retirement income, investment management, tax management, protection/insurance planning, and estate planning. Within that we are working to become world class at retirement income planning and tax management and doing tons and tons of research and training.
One aha we have had over the last several years is tax management. We are not accountants or CPA’s and do not offer tax preparation currently. However, we had several epiphanies: (1) Our great clients like you crave to know and understand more about taxes and tax education (2) every investment decision that people make has a tax consequence. As we go forward, we will be talking more and more about taxes. Why? Because we know it is important to you and it is an important component when we discuss retirement income planning.
One of the trainings we went to recently, the instructor kept emphasizing this quote, “It is not what you make, it is what you keep.” The emphasis is that so many times financial planners talk about rates of return which are certainly important but they do not either understand tax implications or neglect to consider the affects of taxes in the scope of the plan. What good does it do you to have great rates of return just to give it away to the Government because of inefficiencies in the tax management of your investments?
I shared in a previous blog that we feel the tax winter is coming. Since that blog about six months ago, I have immersed myself in even more tax training. One book that I have read several times and watched the accompanying video on Amazon Prime is called the Power of Zero by David McKnight. It is a very sobering book and video. I always tell clients do not kill the messenger. However, I really want to emphasize again. The US is $30 trillion dollars in debt. To wrap your head around a trillion is hard. It is nine zeroes after the 30. To put in context, if a dollar is a second a Million dollars is 11 days. A Billion dollars is 32 years. Trillion is 30,000 years. So we as country are 960,000 years in debt. It is staggering!
What I have been studying through Power of Zero and other resources is a lot of tax history. As much as you may think taxes are high now, candidly our tax rates right now are some of the lowest in last 100 years. A lot of you paid a lot higher taxes earlier in your life. To give a data point, right now a couple making $120K of taxable income have an effective Federal tax rate of about 11% ($13,200). In 1980, because of inflation, that equivalent income would be about $40K. The effective tax rate then would have been 26%.
Putting it all together, we think in terms of probability. With high debt, the probability is extremely high at some point tax rates are likely to rise considerably. When? We know current Tax Cuts and Job Act is supposed to sunset at end of 2025. However, the magnitude that I am talking about we are not sure. Reality is the government will kick the can down the road until they cannot do it anymore.
What is a solution? For many Baby Boomers and Gen Xers like me, we have been told to put as much money in the pre-tax accounts like IRA's and 401k's. The assumption is that we would be in lower tax brackets at retirement. Thinking ahead that may or may not be true. Something that you should really consider is getting more in post-tax and tax advantaged accounts. Roth IRAs and Roth 401ks are some of the most obvious. One area that we have done a lot of research into is cash value life insurance. As a firm we did not reccomend permanet cash value life insurance in the past. However, my opinion on this has changed since permanent life insurance may be a good alternative for a tax free income stream in retirement. It is not for everyone but as fiduciaries, we feel obligated to mention this to clients so they know their options.
In closing, sorry to have somewhat bummer of blog. However, as fiduciaries we feel that we need to be pro-active with tax management rather than reactive. If you want to talk more, set up time with our financial professionals who are conversant in tax management.
*certain rules may apply for distributions to obtain tax-free status