You don’t need a giant salary in order to accumulate wealth. You don’t need an inheritance to “finally get ahead.” In fact, I have met plenty of people who fit in one or both of those descriptions who are much further behind in their financial plan than those without them. You want to know one of the more impactful lessons you can learn to assist in wealth accumulation?
Know and identify tax triggers and tax erosion!
Before I elaborate, let me walk you through an example that should illustrate these points.
You meet an advisor, let's call him Marty, who has “The Investors Almanac” and says he can double your money every year for 21 years. You seem skeptical but you humor him by giving him $1. Year one goes by and he shows you that your investment is now $2, however, Federal and State tax required 40% of the growth. Your investment going into the next year is now $1.60 and it, in fact, doubles again to $3.20. You owe the 40% again -- now you have $2.56.
By year 21, you have roughly $13,000. You are over the moon! You want to go back in time and give
Marty the whole $13,000 and have him do it all over again!
Ok, now we hop into our literary DeLorean and go back to Marty’s office. We just miss Marty but you’re greeted by Doc, his elderly business partner with crazy white hair. Doc gets a crazy look in his eyes and says HE can double your money every year for 21 years, as well, BUT do it in a $0 tax environment. His giant, buggy eyes and twitchy behavior make you skeptical again and you leave him with $1 and return back to the future.
You go, pull a report, and you can see your money go from $1 to $2 to $4…and in the same time period as Marty, Doc earns you nearly $1,050,000!
WHY ON EARTH WOULD ANYONE USE MARTY!?
You see, there are two things that can seriously diminish your wealth accumulation. Those two things are “tax trigger” and “tax erosion.” When you accidentally trigger (or ignorantly don’t plan to counter) tax triggers, you have to financially take a step back and re-earn the lost dollar. When there are unnecessary tax exposures that slowly (and unnecessarily) whittle away at your estate, you take a step back and have to re-earn that dollar.
And to add insult to injury, the lost dollar is not just a dollar. It’s a dollar plus future interest. And THAT is why Doc blew Marty out of the water!
In my opinion, it is far more impactful to work with clients, first, on how they are going to protect their wealth and minimize taxes, before going down the road of risk and investment selection. Having a strategy on selling assets and minimizing taxes is an often neglected and hugely impactful piece of a prosperous plan.
This is true regardless the salary, inheritance, etc. Needing to earn back your losses is harder than keeping your money in the first place!
Kingsview Wealth Management does not provide tax, legal or accounting advice. The information was prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.