How important is tax strategy for building wealth?

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HomerJ
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Re: How important is tax strategy for building wealth?

Post by HomerJ »

bigtex wrote: Sun Dec 27, 2020 6:12 pm Where would you rank tax strategy (minimizing taxes) in the most important things in building wealth? Wondering how important it is to minimize taxes.
I have never bothered to do anything extra to minimize taxes. But then my investments in taxable are pretty simple. Basically just Money Market and Total Stock Market Index Fund.

Everything else is inside a 401k or IRA.

Living below your means, and saving a ton is number #1
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
vasaver
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Re: How important is tax strategy for building wealth?

Post by vasaver »

HomerJ wrote: Thu Dec 31, 2020 11:17 am
bigtex wrote: Sun Dec 27, 2020 6:12 pm Where would you rank tax strategy (minimizing taxes) in the most important things in building wealth? Wondering how important it is to minimize taxes.
I have never bothered to do anything extra to minimize taxes. But then my investments in taxable are pretty simple. Basically just Money Market and Total Stock Market Index Fund.

Everything else is inside a 401k or IRA.

Living below your means, and saving a ton is number #1
I would say you are doing more than 90% and probably 99% of people by just having Total Stock Market in taxable.
smitcat
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Re: How important is tax strategy for building wealth?

Post by smitcat »

HomerJ wrote: Thu Dec 31, 2020 11:17 am
bigtex wrote: Sun Dec 27, 2020 6:12 pm Where would you rank tax strategy (minimizing taxes) in the most important things in building wealth? Wondering how important it is to minimize taxes.
I have never bothered to do anything extra to minimize taxes. But then my investments in taxable are pretty simple. Basically just Money Market and Total Stock Market Index Fund.

Everything else is inside a 401k or IRA.

Living below your means, and saving a ton is number #1
Do you have any plans for withrawing funds from the 401K?
Did you plan your AA split between taxable and pretax?
Have you looked at the taxes for those 401K withdrawals?
Do you have a plan for timing of SS?
Have you looked at funds transfer for heirs if that is applicable to you?
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Sandtrap
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Re: How important is tax strategy for building wealth?

Post by Sandtrap »

An important aspect of wealth building as assets increase is the use of "tax shelters".

There's only so much that can be done as a wager earner (salary or hourly, etc) in the way that income is taxed. So, as the asset base increases (one's personal holdings including a market investment portfolio), it might be useful to look at "tax shelters" such as physically held R/E in various forms and functions, business entities (a mufler shop. . a pawn shop. . . etc), and so forth.

In my experience, there is a good reason why high earning professionals such as some doctors, etc, invest in apartment buildings, etc. But, business diversification and hard assets like this is not for everyone and depends on size of "wealth" and nature of it, an so forth.

Lot's of ways to do these things based on personal experience, "sleep factor", and inclination.
Sometimes it requires a bit of "thinking outside of the box", sometimes not.

j :D
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wandering_aimlessly
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Re: How important is tax strategy for building wealth?

Post by wandering_aimlessly »

I do believe "tax awareness" has a significant impact on wealth over time...I include in this understanding and utilization (where appropriate) of all the tax credits/deferrals offered within the code. I also include awareness of all taxes (income, property, sales etc.) Always amazes me how little people may know about sales tax in their state or property tax procedures...probably not as big as income tax for most but not inconsequential for many. One of the particularly challenging elements of tax is that the rules change regularly...today's tax haven is tomorrow's taxable event so while I feel like I control more about how much I earn, how much I save, how I invest, how much I pay for investments, even estimating how much I should make over the longer term, I often feel very much more at the mercy of a government entity to determine the tax impact on my life. Don't get me wrong - this doesn't mean I take a passive approach to taxes - just that I devote more time and energy to them to understand and execute than if they were stagnant.

What I don't believe is important to the vast majority of folks are "secret tax strategies" appropriate for very wealthy individuals which may or may not have merit and could (maybe likely) require someone to go to court on your behalf to defend their basis (I wouldn't waste a second trying to figure these out).
deserat
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Re: How important is tax strategy for building wealth?

Post by deserat »

Normchad wrote: Mon Dec 28, 2020 10:52 pm
TravelGeek wrote: Mon Dec 28, 2020 10:42 pm
corp_sharecropper wrote: Mon Dec 28, 2020 10:31 pm Haven't read every post but having been a member here for a good bit I can say there are tons of people and tons of advice that are letting the tax tail wag the dog around these parts. It's as if logic & reason go out the window as soon taxes come into play. Sometimes I'm not even sure some posters actually understand that taxes are owed on profits, literally I get the impression that there are people who actively avoid gains because they're gonna get taxed.
I am more concerned/surprised about the amount of time some people spend discussing strategies to save a few bucks on their tax software... every year :)
That's a good point too! I'm always amazed at how little most people understand about their own taxes. I don't think I know anybody in real life that could *their own taxes* with a pencil and the forms from the library.

Unfortunately for them, they will never know how much their own ignorance is costing them.....
I do and have done my taxes by hand for over 20 years. I do it to see how my government interprets and incentives certain behaviors/businesses. The simplification that supposedly occurred a few years ago didn't simplify anything for me. I have double the amount of forms now for a very similar income situation.

To the OP, tax efficiency can become important when one is older and has RMDs. There are many models available to determine whether or not to do Roth conversions or RMDs. That type of decision is very specific to the income and investment scenario of the person. It also depends on the age of that person and their marital status.

Also, the tax laws and retirement vehicle investment opportunities have changed significantly over the last 20-30 years. Many of us have lived through those changes and have had to adapt to our income, retirement and tax situations. The tax rates have fluctuated as well as the tax treatment of investment gains.

As most here, I would choose financial behavior as #1 with income a very close #2. Changing behavior can be much more difficult once it is entrenched. Ask any doctor about patients they have who need to change their behavior for health reasons (smoking, drinking, drugs, obesity, etc). I would place tax strategies in the top ten and if one has a 'gap' to be able to transition tax deferred savings to a Roth situation, then if the model shows tax savings over RMD taxes, it's probably best to convert. But as above, YMMV and that is due to your income stream situation over time.

I-orp/RPM do fairly decent jobs of modeling possible tax scenarios based on one's situation. Compared to what was available 10-20 years ago to model one's situation, we are fortunate indeed to be able to make very well-informed decisions if we wish to.

Happy New Year 🙂
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HomerJ
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Re: How important is tax strategy for building wealth?

Post by HomerJ »

smitcat wrote: Fri Jan 01, 2021 9:40 am
HomerJ wrote: Thu Dec 31, 2020 11:17 am
bigtex wrote: Sun Dec 27, 2020 6:12 pm Where would you rank tax strategy (minimizing taxes) in the most important things in building wealth? Wondering how important it is to minimize taxes.
I have never bothered to do anything extra to minimize taxes. But then my investments in taxable are pretty simple. Basically just Money Market and Total Stock Market Index Fund.

Everything else is inside a 401k or IRA.

Living below your means, and saving a ton is number #1
Do you have any plans for withrawing funds from the 401K?
Did you plan your AA split between taxable and pretax?
Have you looked at the taxes for those 401K withdrawals?
Do you have a plan for timing of SS?
Have you looked at funds transfer for heirs if that is applicable to you?
Ah, there you got me...

I do plan to be careful how much we pull out of the IRA/401k when we retire. We will work hard to keep our "income" under the ACA cliff, so that we can still get health care fairly cheaply. The rest of our spending money we will pull from the taxable account, some is just money-market and basically cash, some will be pulled from TSM, and we'll have to pay capital gains on that money.

Not really worried about heirs at all yet. And will probably just take SS as soon as it's available.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
smitcat
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Re: How important is tax strategy for building wealth?

Post by smitcat »

HomerJ wrote: Fri Jan 01, 2021 12:11 pm
smitcat wrote: Fri Jan 01, 2021 9:40 am
HomerJ wrote: Thu Dec 31, 2020 11:17 am
bigtex wrote: Sun Dec 27, 2020 6:12 pm Where would you rank tax strategy (minimizing taxes) in the most important things in building wealth? Wondering how important it is to minimize taxes.
I have never bothered to do anything extra to minimize taxes. But then my investments in taxable are pretty simple. Basically just Money Market and Total Stock Market Index Fund.

Everything else is inside a 401k or IRA.

Living below your means, and saving a ton is number #1
Do you have any plans for withrawing funds from the 401K?
Did you plan your AA split between taxable and pretax?
Have you looked at the taxes for those 401K withdrawals?
Do you have a plan for timing of SS?
Have you looked at funds transfer for heirs if that is applicable to you?
Ah, there you got me...

I do plan to be careful how much we pull out of the IRA/401k when we retire. We will work hard to keep our "income" under the ACA cliff, so that we can still get health care fairly cheaply. The rest of our spending money we will pull from the taxable account, some is just money-market and basically cash, some will be pulled from TSM, and we'll have to pay capital gains on that money.

Not really worried about heirs at all yet. And will probably just take SS as soon as it's available.
I kinda knew you were carefully planning and that taxes were invloved.
Sounds like a great plan - whats not to like?
GCD
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Re: How important is tax strategy for building wealth?

Post by GCD »

This article, and subsequent book of the same title, have been discussed elsewhere on this board (generally getting good reviews). But it addresses, among other things, the relative unimportance of tax strategy in amassing wealth.

https://www.collaborativefund.com/uploa ... 9dbc86.pdf

Master the bottom before you move higher on the pyramid. It's not that taxes don't influence things, it's just that there are other more important concerns. Here is the author's hierarchy of investor needs:

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